Top News

The insurance industry has welcomed the government’s move to consider exempting health and life insurance premiums from Goods and Services Tax (GST). However, industry experts warn that if the exemption is implemented without addressing the issue of the inverted duty structure (IDS), insurance products may actually become more expensive, with premiums rising by an estimated 7–10%.

This unexpected outcome could discourage people from purchasing or renewing insurance policies, a concern that has already been communicated by insurers to industry bodies and regulators.

GST Exemption Proposal Raises Industry Concerns

Currently, insurance premiums are subject to 18% GST, with insurers allowed to claim Input Tax Credit (ITC). For instance, on a ₹100 premium collected, the insurance company effectively retains ₹95 after GST adjustments.

The Group of Ministers (GoM) recently recommended that individual life and health insurance policies should be exempt from GST. However, the GoM did not clarify whether the exemption would come with provisions for the inverted duty structure, a mechanism that allows businesses to claim credit on input taxes when these are higher than output taxes.

Without such clarity, the industry fears that insurers will face a mismatch between input and output taxes, leading to additional costs that would ultimately be passed on to policyholders.

How Premiums Could Rise Without IDS

Industry calculations suggest that if GST is removed without IDS, the net premium collection for insurers on a ₹100 gross premium would drop to ₹87, compared to the current ₹95 after ITC adjustments. This results in a deficit of ₹8 per policy, forcing insurers to increase premiums by up to 10% to bridge the gap.

On the other hand, if GST exemption is provided with IDS, insurers could collect ₹96.5 per ₹100 premium, which would not only avoid losses but also provide marginal relief compared to the existing system.

Potential Impact on Policyholders

A rise in premiums could make life and health insurance products less attractive, especially at a time when awareness of financial security and health coverage is growing in India. Insurance penetration in the country remains relatively low, and experts believe that making products more expensive could slow down efforts to expand coverage among middle-class and lower-income groups.

According to industry insiders, insurers plan to communicate these concerns to the Life Insurance Council, General Insurance Council, the Insurance Regulatory and Development Authority of India (IRDAI), and the Finance Ministry. Their collective appeal will emphasize the need for GST exemption to be paired with IDS to ensure affordability for consumers.\

Why IDS Matters

The inverted duty structure ensures that companies can offset input taxes paid on goods and services against output tax liabilities. In the absence of IDS, insurers lose the benefit of ITC while still incurring tax on various services they use, such as IT infrastructure, administration, and customer support.

This results in higher operational costs and reduced margins, compelling insurers to pass on the burden to policyholders. Industry sources stress that true relief for customers will only come if GST exemption is linked with IDS, allowing insurers to maintain premium affordability.

Bottom Line

While the government’s proposal to exempt health and life insurance premiums from GST is a positive step in principle, its execution holds the key. Without the inverted duty structure, the measure could unintentionally make insurance more expensive rather than cheaper, with premiums rising 7–10%.

To achieve the intended goal of boosting insurance penetration and offering financial protection to more Indians, policymakers may need to revisit the proposal and ensure that IDS is included in the exemption framework.

Only then will policyholders truly benefit from reduced insurance costs and wider access to essential financial safety nets.