GST cut on insurance: What new buyers and existing policyholders can expect

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The government has promised to reduce Goods and Services Tax (GST) on insurance premiums, something that will assist in boosting penetration in a line of business that has been termed costly for middle-class households. The insurance products including life, health, and general insurance were paying an 18 percent tax. The rate has now been reduced to 12 percent, with the direct benefits flowing to the policyholders.

For retail buyers, the cut will mean cheaper premiums on new and even old policies. For example, a health policy with a premium of ₹20,000 previously attracted ₹3,600 as GST. With the new rate, the tax will come down to ₹2,400 — a cut of ₹1,200 a year. On the level of long-term policies, these lower outgo and make insurance cheaper, especially for families purchasing multiple policies.

Renewals also are going to be less expensive as the lower GST is not only for new policies but also for current contracts. Policyholders who pay annual or half-yearly premiums will have the benefit immediately on their subsequent bill cycle. For life insurance policies with long time horizons like endowment plans or term policies, the total amount of savings over generations may be huge, marginally increasing overall returns.

India has historically low insurance penetration compared with others in the region, with most of the population being underinsured. Through the reduction in GST, the government intends to get more people under insurance cover and induce long-term savings. The change is anticipated to assist, particularly for the uptake of health insurance, where affordability has been a key dissuader.

For ULIPs and other investment-linked products, the GST reduction enhances the effective return because a lower percentage of premium is paid as tax. Although the difference might seem marginal on an annual basis, over the policy duration, it maximizes the value to investors.

The insurers have appreciated the move, calling it a long-awaited reform that aligns with the vision of financial inclusion. Some maintain that nonetheless, the campaigns will still be necessary to educate customers on the real benefit and allow them to take responsible decisions.

Yes. The reduced rate of 12 percent will be levied across life, health, motor, and general insurance products. New purchases and renewals will both benefit.

The amount of savings will depend on your premium level. On an annual premium of ₹50,000, you would save ₹3,000 in tax compared to the erstwhile 18 percent GST.

No. The GST reduction affects only the tax element of your premium. Your policy terms and conditions, coverage, benefits, and claims process are not affected.