The Structural and Economic Impact of India's GST Exemption on Individual Life and Health Insurance (GST 2.0 Reform)

SONI SINGH AGNIHOTRI , Dr. Shweta Tiwari , Dr Tapesh Chandra Gupta

GST 2.0, Life and Health Insurance, Input Tax Credit (ITC), Insurance for All by 2047, Premium Affordability, Bima Vahak, IRDAI, Financial Inclusion, Tax Reform, Supply-side Shock.

The 2025 Goods and Services Tax (GST) 2.0 reform in India, which reduced the rate on individual life and health insurance premiums from 18% to 0% effective September 22, 2025, was a landmark strategic intervention aimed at reducing the cost barrier and accelerating the goal of "Insurance for All by 2047". This paper critically analyses the resulting trade-off between demand side i.e maximizing consumer affordability and the structural cost shock imposed on the supply side of the industry. On the demand side, the policy immediately benefited policyholders with up to an 18% reduction in premium outflow, enhancing the affordability of essential protection and improving the value proposition of long-term savings products, such as Unit-Linked Insurance Plans (ULIPs). However, by classifying premium income as wholly exempt, the reform created a significant structural burden for insurers: the complete withdrawal of Input Tax Credit (ITC) on operational expenses, including agent commissions, rent, and technology. This loss translates into an estimated 3-8% increase in insurer operational costs. In response to this cost pressure, insurers will have to engage in price recalibration (risking base premium inflation) and significantly adjust distribution compensation, shifting the 18% GST burden onto intermediaries, resulting in commission cuts of 15-18%. This latter consequence creates a severe policy conflict, threatening the viability of the agent network--the critical infrastructure needed for mass penetration, particularly the Insurance Regulatory and Development Authority of India's (IRDAI) women-centric Bima Vahak model for rural inclusion. While the short-term fiscal cost to the government is an estimated $1.2-1.4 billion in annual revenue loss, the long-term success of the reform hinges on whether the resultant growth in policy volumes and associated economic activity can offset this sacrifice. The paper concludes that securing the intended social benefits requires proactive regulatory monitoring by the IRDAI to prevent the erosion of consumer savings through hidden base premium increases, and targeted fiscal support, such as fractional ITC allowances on critical distribution costs, to stabilize the financial inclusion infrastructure.

Volume 14 Issue 3, March-2026

Pages : d32-d40