• Notification Date: 28-01-2025
• Notification No: N/A

How might GST exemption on life insurance premiums eventually lead to higher premiums for policyholders?

The entire GST exemption on life insurance premiums may lead to the increase in policyholders' premiums inadvertently on the loss of the ITC benefit. Right now, a GST of 18% makes it costlier, and many may claim that it brings down the premium if removed; however, this could have just the opposite effect by warnings from the side of the life insurers.

Here's why: Life insurance companies can claim ITC on the GST paid for goods and services used in running their business, like paying rent for offices and paying commissions to agents. If GST is exempted, insurers will lose this offsetting ability, and they would most probably pass it on to the policyholder in terms of increased premiums. For example, a policyholder who is paying Rs. 100 in premiums plus Rs. 18 in GST might now have to pay Rs. 109, even as GST is removed.

They claim that they cannot afford more than 18% GST for providing a low premium. In conjunction, they could also avail themselves of the option of ITC for their costs. However, if that also is not available, then their cost of operation would expand up and therefore must increase their premium for covering that gap. Here, they insist that rather than full exemption, they bring the rate up to 12% since nearly it will have a level balancing act between what is given and taken.

Thus, an exemption under GST is generally for the purpose of reducing insurance costs, but, paradoxically, it may work adversely and render life and health insurance unviable for those it was designed to help. To make the delivery of term insurance possible, there is a requirement for a balanced adjustment in the policy of GST in order not to burden the policyholder further.