Why Zero GST on Insurance Premiums May Not Lead to Cheaper Policies in 2025

 

Zero GST on Insurance Premiums: Why It May Not Lead to Cheaper Policies for You

The Centre’s proposal to remove GST on insurance premiums has sparked excitement, but financial experts warn that this change might not translate into significant savings for policyholders. While the removal of the current 18% GST on life and health insurance premiums seems like a win, the reality could be more complex than it appears.

Current GST Impact on Insurance Premiums

At present, insurers charge 18% GST on all new and renewed life and health insurance policies. For example, an annual premium of ₹20,000 carries an additional ₹3,600 as GST, bringing the total cost to ₹23,600 for the policyholder.

Why Zero GST May Not Lower Premiums Much

Abhishek Kumar, Sebi RIA and founder of Sahaj Money, explains that while reducing GST from 18% to a lower rate would directly lower costs for customers, completely removing GST could backfire. Insurers currently benefit from an Input Tax Credit (ITC) system, which allows them to offset GST paid on their operational expenses against the GST collected from policyholders.

If GST on premiums is set to zero, insurers would lose the ITC benefit. This loss could lead them to raise the base premiums to cover their higher tax burden—offsetting much of the expected savings on GST removal.

How Input Tax Credit (ITC) Works in Insurance

ITC allows insurance companies to claim credit for GST paid on their purchases and operational costs, reducing their overall tax liability. This mechanism helps keep policy prices stable. Without ITC, insurers bear a higher operational cost, which is likely to be passed on to customers through increased premium rates.

Why a Reduced GST with ITC Intact Is Better for Policyholders

Experts suggest that a partial GST cut, say from 18% to 5%, while keeping ITC intact, could offer more tangible savings. For example, on a ₹25,000 annual premium, GST would reduce from ₹4,500 to ₹1,250, giving a substantial saving of ₹3,250 to the policyholder.

In contrast, if GST is completely removed, insurers may hike their base premiums to compensate for ITC loss, resulting in far smaller net savings for customers.

The Bottom Line

While “zero GST on insurance premiums” sounds like a major customer benefit, the actual advantage may be limited. A balanced approach involving a lower GST rate combined with continued ITC benefits could deliver better cost relief for insurance buyers.