Lately, there have been multiple demands to exempt term life insurance premiums from the ambit of GST (Goods and Services Tax). A high GST rate of 18% on life insurance premiums makes the plan too costly for many to afford. So, either they end up taking no insurance or take a much lower life cover than what they could have done in the absence of GST. Many believe that if life insurance premiums are completely exempted from GST, they will need to pay a much lower premium.

A recent post on X by Ajit Jha, who works as an assistant professor at the Institute for Studies in Industrial Development, underlined that sky-high GST on both health and life insurance policy rates was deterring people from renewing their policies and getting proper insurance coverage.

Per his X post, Jha was paying a GST of Rs 5,467 while paying a renewal premium of Rs 30,373 for his health insurance policy, which offered a sum insured of Rs 25 lakh.

But is complete GST exemption on term or health premium payment the solution? Very few people would have thought that a complete exemption may do the opposite and make the premium expensive. Life insurance companies seem to think so. As per several media reports, life insurers have vociferously argued against complete exemption of GST, saying that exempting life insurance premiums from paying 18% GST will, in reality, defeat the purpose of making term insurance, which is possibly the most affordable mode of insurance, available to everyone.

The primary reason behind this is that the life insurance companies won't be able to claim input tax credit against the GST collected on the premiums as there will be no GST. “Due to this additional burden (withdrawal of ITC benefit), life insurance companies will be compelled to increase the premium, which will not fully meet the objective of the government to provide life insurance products at affordable prices. Additionally, GST exemption on renewal premiums (for policies sold in previous years) would make it onerous and unviable,” the companies stated in a common representation.

Wondering how GST removal can increase your life insurance premium? We decode it for you.

How much do you pay in GST when you buy a life insurance policy?

At present, you are required to pay 18% GST when you pay premiums for a term insurance policy. This means that if your term plan has a premium of Rs 100, you’ll end up paying Rs 118 in total, with the additional Rs 18 collected by the insurer as GST.

But, in addition to collecting this GST, life insurers are also entitled to something called an input tax credit (ITC). Explains MS Mani, Partner, Deloitte India, “When a life insurance company charges GST on its term policies, it is also entitled to an input tax credit, or ITC, on all the things that it buys and all the services that it receives, which are directly involved in further providing insurance-related services to the customers.”

Understand it this way. From the total premium charged by the life insurer from you, a predetermined potion is kept aside by the life insurer to cover their fixed and variable costs. These can include paying salaries/commissions to staff or insurance agents, printing office stationery, paying office rent, creating and disseminating marketing material, and more. Note that GST is being paid by your insurer on availing of all these services as well.

But since these expenses are being made to eventually provide insurance-related services to the end customer, the tax laws allow life insurers to take input tax credit (ITC) for the GST amount paid for such goods and services and adjust the paid GST amount against the GST amount collected by insurers from customers.

What is input tax credit in the case of life insurance companies?

Understand this with an example. Hypothetically, say you pay Rs 100 as a premium for your life insurance policy, with Rs 18 as GST. Assume that out of these Rs 100, your insurer sets aside Rs 20 for office rent and another Rs 30 as commission paid to the life insurance agent. In both of these cases, GST is payable at the rate of 18%.

So, the total GST paid by life insurers comes down to Rs 9 (18% of Rs 20 i.e., Rs 3.6) + (18% of Rs 30 i.e., Rs 5.4). This is what life insurers will claim as ITC. So, if we assume that these are the only two costs your insurer has to bear, the government gives them ITC for GST paid on these two.

Hence, the life insurer’s final GST liability will come down to just Rs 9 (Rs 18-Rs 9).

But if term insurance premiums are completely exempted from the purview of GST, the benefit of ITC will also be done away with. So, while policyholders may simply have to pay Rs 100, the GST burden on life insurers paying for these services will continue to stay constant at Rs 9. Moreover, they will have nothing to offset this against.

Mani further explains that if premiums on term cover become e, then, to the extent of the services used for providing this service, the life insurance company will not be able to take an input tax credit.

“So, if insurers don't take an input tax credit, that means their overall cost will add up. Previously, when they would have received an invoice from their service provider, they would have considered the GST paid to them as credit and not an expense, which they could offset against their liability. Now, if they don't have eligibility for input tax credit, they will have to mark this expense up to the end consumer," he adds.

Hence, they may charge this to the end consumer, meaning potentially a higher premium payable at the hands of the end policyholder. In this case, if they add the ITC amount foregone, then the premium would rise to Rs 109. This means that despite removing 18% GST, the final premium would not come down from Rs 118 to Rs 100 but would be Rs 109.

Per Vivek Jalan, Partner, Tax Connect Advisory Services LLP, “The eligibility to input tax credit depends on whether the services or goods used are used for providing a taxable service. So, the moment a service becomes exempt, there is no right to claim an input tax.”.

What are life insurers demanding?

Life insurance companies are demanding a rationalization of rates rather than a complete exemption of GST on premiums paid on life insurance policies.

According to the TOI report, multiple representations made by life insurance companies state that their total ITC comes down to 11%. Simply put, the GST paid by life insurers might roughly be approximately Rs 11 out of each Rs 100 premium collected.

So, per their demands, if the GST rate on life insurance premiums is tapered down to 12%, it would allow them to take advantage of ITC and not pass on increased costs to the policyholders since they would still have some available margin.

Delhi-based GST expert Bimal Jain elaborates, “If around Rs 11, which has been paid on the purchase or inward supply by the life insurer, is not getting any credit due to GST exemption, it will become a cost, taking the potential total premium payable by term insurance policyholders to Rs 111. When the GST rates are brought down to 12%, the GST paid by consumers stands at Rs 112. This narrow margin of difference can help life insurance companies to economise their term insurance pricing.”

But why are ITC margins of life insurance companies so high? According to Jalan, commissions paid to life insurance agents form a significant portion of expenses in the books of life insurers. This “Our GST data analysis in October 2024 revealed that life insurers end up incurring around 40-45% ITC on Rs 18 collected as GST from consumers.

Jain concurs. “Life insurance is largely a commission-based business, with around 15-25% of a life insurer’s total expenses largely devoted to aggressively advertising, marketing the product, and commission payments to agents selling life insurance policies.”

With an 18% GST chargeable on all these services, it adds up as a significant expense in the books of life insurers, which would pass on completely to the consumer if GST exemption is brought to effect.

If the GST is brought down from its present rate of 18% to 12%, it will prove to be beneficial for both life insurers and policyholders. This is because in this scenario, while insurers will be able to claim full input tax credit (ITC), policyholders will be potentially paying lower premium as compared to existing levels.