Goods & Services Tax (GST) is an indirect tax that came into existence in place of service tax & value-added tax (VAT). It is a destination-based tax that created uniformity in the taxes levied on the supply of goods & services in India. It replaced the cascading effect of multiple-level taxation with a unified system.
It helps determine the cost of financial products, including life insurance. When it comes to GST on Life Insurance, it is applied on the premium to be paid by the policyholders, having a direct implication on the total amount payable. Hence, it becomes important to gain an understanding of GST to make an informed decision & choose an appropriate plan depending on one’s requirements.
The life insurance premiums were taxed @18% since it was launched in India on July 1, 2017. But now the GST council has amended the GST to 0% from Sept 22, 2025, where the policyholders are not required to pay any GST on all health & life insurance plans.
Why was this change introduced?
The government of India reduced the taxes on life insurance premiums from 18% to 0%, not only for tax relaxation, but to create a system providing financial protection. Let us understand the picture in detail:
- To Improve Insurance Penetration
The life insurance penetration rate, i.e. the ratio of premium to GDP, has been around 4%, whereas in developed countries, it was around 10-12%. Hence, the high cost was one of the reasons to do so.
- To Encourage Financial Inclusion
The government’s vision of “Insurance for all by 2047” includes bringing one household with life or health cover. Hence, by reducing the premium amount, this vision can turn into reality.
- To Support the Middle Class
By reducing the total insurance cost, a middle-class person will now be able to deal with the rising costs & inflation, providing all with financial protection.
- To Simplify the System
Earlier, different insurance types had different taxes applicable, but now, after GST reforms, it has brought a transparent & uniform system across India.
List of GST rates on different life insurance plans
Provided is the list of GST rates on different life insurance plans:
| Type of Insurance Plan
|
Earlier GST rate (Before 22 Sep 2025) | How GST was applied
|
GST rate (after 22 Sep 2025)
|
| Term Life Insurance | 18% | GST was applied to the entire premium amount | 0% |
| Endowment/ Traditional Plans | 1st year – 4.5%
From 2nd year – 2.25% |
1st year – 18% was charged on 25% of the premium amount
From the 2nd year, 18% was charged on 12.5% of the premium amount |
0% |
| Unit-Linked Insurance Plans (ULIPs) | 18% | GST was charged on the risk coverage part & the associated charges thereof. | 0% |
| Health Plans & Add-on Riders | 18% | On the entire premium. | 0% |
| Group Insurance Plans | 18% | On the entire premium. | 18% |
| Pension Plans | 1st year – 4.5%
From 2nd year – 2.25% |
1st year – 18% was charged on 25% of the premium amount
From the 2nd year, 18% was charged on 12.5% of the premium amount |
0% |
Benefits of GST reductions on life insurance premiums
The main advantages of the recent exemption of GST on Life Insurance premiums are:
- Increased savings on life insurance premiums
The reduced GST on the life insurance premium reduced the overall cost, due to which policyholders are able to save more.
- Improved accessibility of life insurance
Due to a lower premium amount, the life insurance has now become easily accessible to a larger segment of people.
- Encouragement for first-time policyholders
Due to reduced taxes, the individuals who never bought insurance will now be encouraged to buy it.
- Enhanced coverage within the same budget
Now, policyholders can consider increasing coverage within the same budget due to reduced premiums.
- Promoting nationwide life insurance access
This amendment will help promote access to life insurance plans nationwide, providing them with financial protection.
- Wider reach in rural & underserved areas
Due to reduced costs, it enables the insurance company to offer more budget-friendly plans in rural areas, providing them with financial security.
Factors to be considered while buying a Life Insurance plan with the new GST rates
The factors to be considered while choosing an appropriate life insurance plan are as follows:
- Understand your insurance needs.
Assess the financial requirements, future financial goals, existing liabilities, etc., to consider the life insurance coverage required.
- Compare plans & premiums.
Compare different life insurance plans available in terms of their features, benefits, pricing, coverage, etc.
- Choose the right policy type.
Choose the type of plan required, i.e. ULIPs, term, health, endowment or whole life, considering your financial objectives, risk tolerance level, & investment horizon.
- Look at the claim settlement ratio.
Look for an insurance company that has a high claim settlement ratio, ensuring timely settlement of claims when needed.
- Check policy duration
Check for the policy tenure, ensuring it covers the number of years for which the income or financial support is needed.
- Consider adding riders
One can use the amount saved due to the reduction of taxes to buy additional riders, such as critical illness riders, accidental death riders, waiver of premium riders, etc.
- Buy from trusted insurers.
Buy from trusted insurance service providers, authorised insurers, or official websites to make an informed decision while buying a life insurance plan.
What Affect Does it have on the insurance industry
Let us understand the aftereffect of this amendment:
- Higher Policy Adoption
The insurance companies are now witnessing a sudden increase in the number of purchases due to the affordability factor.
- Lower Lapse Rates
The affordability leads to lower lapses in terms of discontinuation of policies, hence the insurance industry is witnessing a high retention rate & increased satisfaction amongst clients.
- Simplified Pricing Models
Due to the removal of multiple tax slabs, insurance companies can now indulge in the innovation of their financial products.
- Better Financial Planning Integration
Now, more of the insurance professionals inculcate life insurance as their core sector of financial planning amongst clients.
Conclusion
The removal of GST on life insurance premiums has provided financial relief to individuals looking for insurance. Due to reduced premium costs, life insurance has now become accessible to a wider population. Hence, promoting financial protection with increased insurance penetration all over India, which encourages Indians to secure their financial future.