Insurance Premiums May Soon Be GST-Free, But Don't Expect Full 18% Drop: Experts

Insurance premiums, currently subject to an 18% goods and services tax, may soon be exempted from it.

The group of ministers on GST reform is set to recommend a complete exemption of goods and services tax on health and life insurance premiums under the revamped regime expected to roll out around Diwali.

Industry experts, however, warn the benefit may be far more modest.

Aditya Shah of Hercules Advisors explained that insurers currently factor in input tax credits while pricing policies. "On a 1,000 premium, about Rs 700 goes towards mortality, Rs 100 towards expenses, and the rest for solvency margin and profit. Earlier, companies claimed Rs 18 ITC on that Rs 100 expense. Without ITC, premiums could rise by about Rs 18, which is barely 1.8%. So it's not going to be that significant," he said.

Shah cautioned against expecting a straight 18% cut in premiums. "If ITC is scrapped, companies' expenses will keep rising. Over time, premiums could stay the same or even climb higher. A smarter solution would be a 5–12% GST with ITC, which would pass on a 6-7% benefit to customers," he noted.

For senior citizens who often pay upwards of Rs 1.5 lakh annually for a Rs 10 lakh cover, any GST relief is welcome. But the savings may be closer to 5-7% rather than a full 18%, according to Shah.

There's also no case to delay buying a policy in hopes of cheaper rates, he stressed. "The best time to buy insurance was yesterday, the next best is today. Risks don't wait. While near-term cuts may help, insurers will eventually hike premiums as costs compound. It's better to lock in a multi-year policy now," he said.

Importantly, those who've already bought multi-year policies won't get refunds on GST already paid. The benefit will only apply to new or renewed policies after the exemption takes effect.

In Shah's view, the bigger win would be if the government allowed ITC while lowering GST. "That would be good for both insurers and policyholders, even if it's a short-term revenue loss for the government, it's a long-term gain in higher insurance penetration," he said.