Submitted by admin on August 22nd, 2025
With the advent of the Goods and Services Tax (GST) regime in 2017, the taxation environment in most sectors has been changed dramatically. Since insurance is a social security measure, as well as is a means of finance, it has been heavily affected by GST considerations. At the moment, the GST is charged at 18 percent on the insurance premium, thus making them expensive to consumers. The proposal of providing full GST exemption on health and life insurance premiums that has been circulated in recent times has again brought in a fresh debate where the idea may help in reducing the cost after-tax to the policyholder but could also see the insurers change the structure of premium charging to recover other costs.
This paper discusses this proposal, its impact to the consumers, the insurance companies and the Oregon economy, and whether this overhaul is really capable of making insurance affordable and accessible to more people.
As it stands, life insurance, health insurance and other general insurance products are all getting 18% GST. For instance:
In the case of health insurance, an amount of 20,000 a year must be paid. An amount of 3,600 as GST would be charged on this amount, which brings the annual total to 23,600.
Likewise, a premium of 10, 000/- on a term life insurance would attract a GST of 1800 only and hence the actual expense would amount to 11,800/-.
This tax adds considerable cost-burden to the consumers especially when insurance coverage in India is already lower than the world average.
Indicatively, as shown on IRDAI (Insurance Regulatory and Development Authority of India) figures, the penetration is 3.2 percent of GDP on life insurance and below 1 percent moving towards health insurance.
Considering that the role of insurance is to secure people financially, particularly in times of emergency, the imposed GST can be regarded as a deterrent measure where people are not willing enough to purchase the right amount of coverage.
The government is reportedly considering granting a complete GST waiver on premiums paid towards life insurance and health insurance policies. If implemented, this would mark a major shift in taxation policy, aligning with the broader national objective of increasing financial inclusion and strengthening the social security net.
The exemption is expected to apply to:
This reform would effectively reduce the tax burden on policyholders, making insurance products cheaper and more attractive.
The most immediate benefit for consumers would be a reduction in the effective cost of premiums. For example:
This means policyholders save ₹3,600 annually on a single health insurance plan. Over a 20-year horizon, the savings can be significant.
The penetration rate in India has been low on the grounds of affordability. The elimination of GST will most probably inspire people, particularly those belonging to the middle-income group and lower income strata, to purchase health and insurance policies.
The premiums of the senior citizens on healthcare insurance are considerably high because of the need to cover risks related to their age. The high prices of the GST makes these policies even more unaffordable A waiver can help the older persons to afford keeping insurance.
Life insurance does not only cover the risks but also acts as a savings and investment tool to most of the households. More affordable prices can stimulate an increased number of people to enter long-term financial planning tools such as pension schemes and child education insurance.
Although this sounds consumer-friendly on paper, it can also be possible that insurance providers respond by changing premium terms undoing some of the savings. This possibility is due to some factors:
Inflation rates in India in hospitable things like medical items is estimated at 14 -15 per cent per annum period one of the highest in the world. With the increase in cost of treatments, insurers are forced to increase premiums of the health insurance products to maintain sustainability.
The post-COVID claim ratios have grown very high. Hospitalization, lifestyle diseases and critical illnesses claims have made health insurers pump-up more funds.
The IRDAI requires the insurers to maintain a minimum solvency ratio so as to ensure their financial stability. Due to increasing claims, there is a tendency of businesses to raise premiums so that the ratios can be sustained.
Insurance is already a low-margin business in India and insurance, particularly, term and health policies are a low-margin business. The companies may also not gain directly with the loss of the GST because the tax is imposed on the consumer. In a bid to sustain the margin under the increasing risks, they may adjust premium upwards.
Thus, while the gross premium amount may increase, the absence of GST ensures that the net cost to consumers still comes down.
Let us illustrate with a simple comparison:
Even with a 10% hike, the consumer pays ₹1,600 less than in the current regime.
Therefore, the waiver creates net savings for policyholders, unless insurers hike premiums by more than 18%, which is unlikely in the near term.
Such exemption may result into increased demand of health and life insurance which will widen the number of customers. Increase in volumes is likely to counter any margin concerns in the short run by the insurers.
To generate new clientele, insurers can get creative offering micro-insurance and wellness-based cover and hybrid products that marry protection and savings products.
As other players enter and take on the quest to snare the market share in the expanding sector, insurers might not be keen to increase premiums. Competition would rather restrain the price levels.
This can result in lower premiums, allowing policy holders to find it easier to renew their policies, to reduce lapse issue and increase the persistency rates on the part of insurers.
The accessibility to more health and life insurance schemes decreases the reliance on the state sponsored medical programs, which decreases the economic burden.
The big worry of the middle classes in India is soaring medical cost. Tax exemption on insurance premium would present a big relief.
The cheaper life insurance provides households with a nudge towards a long-term financial planning to help establish a savings and risk protection culture.
Most countries consider the provision of health and life insurance as a necessity that no taxes should be imposed on it. Similar stand in India would be in global conformity.
There are apparent advantages to the move, but there also appear to be some challenges involved:
Government Revenue Loss: GST on a premium insurance cause government to lose significant income. A complete exemption can dent the government revenues and this may force them to achieve that shortage elsewhere.
Complexity of implementation: To handle the exemption, insurers will have to restructure their pricing practices and patch up systems.
Threat of Premium Mispricing: When insurers irregularly increase base premiums, then the targeted consumer value is likely to be muffled.
Industry experts believe that GST exemption is a step in the right direction but must be accompanied by regulatory oversight to ensure insurers don’t overcompensate through premium hikes. According to some analysts, the government could also consider partial exemptions or differential tax treatment, such as:
This would ensure essential protection products remain affordable while revenue streams from investment-oriented products are not entirely lost.
The government’s proposal comes at a crucial time when healthcare costs are rising, and awareness about financial protection is growing post-pandemic. A GST exemption can prove transformative by making insurance products more affordable and expanding penetration across India’s vast underinsured population.
However, effective implementation will require balancing industry viability and consumer welfare. Regulators may need to monitor premium hikes closely to ensure that the exemption delivers its intended benefits.
The proposed full GST exemption on health and life insurance premiums is a landmark reform that could reshape India’s insurance landscape. While insurers may revise premiums upward due to rising costs and claim pressures, the elimination of the 18% GST burden ensures that the post-tax cost for consumers will still reduce.
For individuals, the waiver represents meaningful savings and an opportunity to secure better coverage without financial strain. For the industry, it offers a chance to deepen penetration and innovate products for a broader audience. And for the economy, it strengthens the foundation of social security, reduces fiscal stress from healthcare spending, and promotes long-term financial planning.
In sum, even if insurers hike base premiums modestly, the GST exemption ensures that the net impact remains positive for policyholders. The move could be the long-awaited catalyst to push India’s insurance penetration closer to global averages, thereby securing millions of households against unforeseen risks.
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