GST exemption on life and health insurance raises questions on real consumer benefit

The debate around GST on insurance premiums has once again come into the spotlight. At present, an 18% Goods and Services Tax is levied on life and health insurance premiums. Many consumers and experts argue that this high rate makes essential protection expensive and out of reach for a large part of the population. Recently, the Group of Ministers (GoM) recommended granting a complete exemption to individual life and health insurance. The final decision is now with the GST Council, which will meet soon to take a call.

This development has created a wave of expectations. On the one hand, the government wants to make insurance more affordable and accessible for the middle class and lower-income households. On the other, the insurance industry has expressed concerns that an exemption might not fully benefit policyholders, as the lack of input tax credits (ITC) could raise their operational costs. The central question is: Will consumers actually save money if GST is removed from insurance premiums, or will the benefits be limited?

Comparing India with global practices

India is one of the world’s fastest-growing economies, but its insurance penetration remains low compared to other nations. According to recent data, insurance contributes only 3.7% of India’s GDP, far below the global average of 7–8%. Life insurance covers just 2.8% of the GDP, while non-life insurance, which includes health coverage, accounts for only 0.9%. What is more worrying is that this ratio has slipped from 4.2% during the Covid-19 pandemic years, when people rushed to buy policies, to the current levels.

This low uptake highlights the affordability challenge. Despite India’s massive population, most citizens do not purchase insurance. In comparison, developed countries such as the United States, the United Kingdom, or Japan have far higher coverage levels, sometimes close to universal. One major reason is taxation. Globally, many countries exempt life and health insurance from such indirect taxes. For example, Australia, the US, and the UK either have zero or very low taxes on insurance premiums. India’s 18% slab is one of the highest in the world, which makes policies costlier and discourages new buyers.

The government, therefore, has an important choice to make. Should it continue with the current high-tax structure and risk keeping insurance penetration low, or should it rework the system to make policies cheaper, even if it means losing some tax revenue in the short term?

Will exemption lower consumer costs?

The recommendation by the Group of Ministers is clear: exempt life and health insurance from GST. This move, in theory, should make insurance cheaper for consumers. For example, on a ₹10,000 annual premium, an 18% GST adds ₹1,800 to the cost. Removing GST would save the policyholder this amount, making policies more attractive.

However, the picture is more complicated. Insurance companies currently enjoy input tax credits on expenses such as marketing, advertising, and agent commissions. If insurance premiums are made exempt instead of zero-rated, insurers will lose these credits. This means their operating costs could rise, as they would have to bear the tax burden on their inputs without any relief.

As a result, experts estimate that while consumers may expect a 15% reduction in costs, the actual benefit may be closer to 6–7%. This partial benefit could lead to disappointment. Insurers may even adjust policy pricing to recover higher costs, leaving only a modest saving for customers. The government has hinted that it may create a monitoring mechanism to ensure that benefits of the exemption are passed on to policyholders, but how effective such monitoring would be remains uncertain.

Exempt versus zero-rated: Why it matters

Another important distinction lies in how the exemption is structured. Many confuse exempt supplies with zero-rated supplies. While both result in a 0% tax rate, the difference is significant. Zero-rated supplies allow companies to claim input tax credits, while exempt supplies do not. If life and health insurance is treated as exempt, insurers will lose their ITC benefits, leading to higher hidden costs.

Some experts argue that the government should consider categorizing life and health insurance as zero-rated supplies, not just exempt ones. This way, insurers can keep their ITC benefits while consumers enjoy lower premiums. Such an approach would create a true win-win situation. If the exemption is poorly structured, however, the insurance industry may suffer, and consumers may not see much relief in their pockets.

Proceeding with caution

The GST Council now faces a delicate balancing act. On the one hand, it cannot afford to ignore the fact that life and health insurance are essential services, especially in a country with rising medical costs and low social security coverage. On the other hand, the government relies heavily on GST revenue, with the insurance sector alone contributing over ₹10,000 crore annually.

The key lies in striking the right balance. A complete exemption without ITC could complicate cost structures for insurers, limiting the benefit to consumers. A smarter approach may be to restructure the tax so that insurance becomes more affordable without damaging the financial health of the insurance industry.

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For India’s growing middle class, a meaningful reduction in insurance costs could encourage more people to buy policies and increase overall penetration. Over time, this could lead to greater financial security for households and reduce the burden on public healthcare. But to achieve this, reforms must be carefully designed, keeping both affordability and industry sustainability in mind.

Opinion:
The government’s intention to exempt life and health insurance from GST is a step in the right direction. Yet, unless the exemption is paired with a smart mechanism to protect input tax credits, the benefit to consumers may remain limited. Instead of a blanket exemption, categorizing insurance as a zero-rated service could ensure that both insurers and policyholders gain. The final call by the GST Council should not just focus on short-term revenue, but on building long-term financial protection for India’s people.