GST rate rationalisation likely to drive growth in life and health policies

GST reduction is expected to enhance affordability and boost life and health insurance sales, especially among price-sensitive segments, though concerns over ITC impact persist

Amid muted insurance penetration, the rationalisation of goods and services tax (GST) rates is expected to boost sales of life and health insurance among price-sensitive customer segments by making policies more affordable.

 

According to the Insurance Regulatory and Development Authority of India’s annual report, insurance penetration in India stood at 3.7 per cent in 2023-24 (FY24), down from 4 per cent a year earlier. Non-life insurance penetration remained flat at 1 per cent, while life insurance penetration increased slightly to 3 per cent from 2.8 per cent. Growth in health insurance has been constrained by affordability concerns amid high medical inflation.

 

Industry experts noted that the successful implementation of a zero per cent GST would also depend on the treatment of input tax credit (ITC) for insurers. A Group of Ministers has recommended completely removing the 18 per cent GST currently charged on insurance.

 

Currently, insurers can claim ITC on costs for reinsurance, commissions, third-party administrator services, and other operational expenses. If insurance is exempted from GST, ITC will no longer be available, potentially increasing costs for insurers. Industry sources estimate that insurers offset 8–10 per cent of premium costs through ITC.

 

“Any reduction in GST rates would lower costs for consumers, addressing part of the affordability challenge. However, affordability is also heavily influenced by rising healthcare costs, not just taxation. Reduction in GST could lead to greater policy renewals or new purchases. A major concern is the treatment of ITC. If insurance becomes exempt or zero-rated, ITC may no longer be available, increasing costs for insurers, which could then be passed on to consumers through higher premiums. The final impact depends on both the availability of ITC and GST rates on input elements. The overall effect on premiums and consumer uptake hinges on how the GST structure is revised,” said Mayank Bathwal, chief executive officer of Aditya Birla Health Insurance Company.

 

Beyond making health insurance more attractive, the outpatient department (OPD) services are also expected to gain popularity after the tax changes. However, the ITC decision will be a key factor in determining the effectiveness of GST adjustments. Insurers are in discussions with regulators, requesting retention of full ITC benefits to mitigate the potential impact.

 

Ankur Kharbanda, executive director and chief business officer of Niva Bupa Health Insurance, said, “Reduction or elimination of this tax would lower costs for consumers, benefiting price-sensitive segments — first-time buyers, senior citizens, and those in Tier-III and Tier-IV towns — and may encourage lapsed customers to return. Removal or reduction of GST could enhance the value proposition of OPD offerings, which are not effectively covered under existing policies, making them more attractive and viable in the market. If health insurance becomes exempt from GST under current rules, ITC will not be available. This could increase effective costs for insurers, who may pass them on to customers, neutralising some GST benefits.”

 

“To mitigate this, industry stakeholders are engaging with regulators, suggesting that even if full ITC is not retained, exemptions or zero-rating should apply at least to key input services like reinsurance and distribution costs,” Kharbanda added.

 

The revenue collected by the central government through GST on health and life insurance premiums rose to ₹16,398 crore in FY24 from ₹2,101 crore in 2019-20, Minister of State for Finance Pankaj Chaudhary told the Lok Sabha in November 2024.

 

Experts note that GST is imposed on the risk portion of premiums, not the investment portion, meaning a rate cut will benefit health and term insurance plans more than unit-linked insurance plans (Ulips) or traditional life insurance plans.

 

“Typically, term and health insurance policies have no investment portion, so premiums are generally low. For traditional life insurance, around 30–40 per cent of early premiums are invested, increasing over time; for Ulips, 80–95 per cent of the premium is invested depending on charges and policy year. The intent is to tax the portion of the premium attributable to ‘risk’ coverage. Therefore, exemption does not necessarily reduce premiums by 18 per cent across all insurance types,” said Jignesh Ghelani, partner at Dhruva Advisors.