"The group of ministers discussed the proposal to make these insurance services free of GST. States expressed their views," convenor of the group of ministers (GoM) and Bihar's deputy chief minister Samrat Chaudhary told mediapersons after the meeting. "The group of ministers' report will be placed before the GST Council."

Further, Punjab finance minister Harpal Singh Cheema told mediapersons that members of the ministerial group felt the benefit of tax reduction should be passed on to the consumers by businesses.

Two government officials told Mint on the condition of anonymity that the tax relief on health and life insurance will be available for individuals and, perhaps, for family health plans as well. However, they did not offer clarity on whether the relief will be available for group policies purchased by companies.

As per official data for FY23, total health insurance premiums in India amounted to approximately ₹90,032 crore. Of this, individual health insurance premiums contributed 39% or ₹35,300 crore. GST amounting to ₹6,354 crore was collected on individual health insurance premiums at the current rate of 18%.

Experts said the move to exempt GST on health and life insurance premiums would provide significant relief to households. 

"At present, the tax burden discourages wider penetration of insurance, particularly among the middle class and lower-income groups. By removing GST, the government would effectively encourage higher insurance adoption, leading to greater financial security and risk coverage in society," said Rajat Mohan, senior partner at AMRG & Associates, a chartered accountancy firm.

However, another expert said removing the GST would not lead to a full 18% price cut.

"This is because insurance companies won't be able to claim back the GST they pay on their own expenses, like commissions, office rent, software, etc," said Saurabh Agarwal, tax partner at EY. "This input tax will now become a cost for them. The final price reduction for consumers will only be the net amount after accounting for this new input tax cost."

Agarwal added that if the tax had been "zero-rated" instead of "exempt", companies could have claimed a refund for the GST paid on their inputs, and consumers would have seen a full reduction of the tax from their premiums.

However, Narendra Bharindwal, president of Insurance Brokers Association of India (IBAI), said while some insurers, especially stand-alone health insurance companies, may find a few difficulties arising from the loss of input tax credit, the overall benefit to the policyholders in terms of a lower upfront cost more than balances the concerns.

To be sure, if a service or product is zero-rated, such as the supplies to an SEZ, suppliers will be able to claim refunds for GST paid on raw materials and services consumed in their business operations. However, if it is exempt, for example, in education and health, refund is not possible. It remains unclear which model the authorities are likely to adopt.

On the other hand, Gurpal Singh Dhingra, joint managing director of Prudent Insurance Brokers said from the point of view of assistance to industry, a calibrated cut to 5% GST may be preferred to a complete waiver.

"It is relief to the consumer balanced with operational efficiency by maintaining the ITC chain for insurers along with cascading costs," Dhingra said.

He added that while a nil GST regime would directly lower out-of-pocket costs and make health and life insurance extremely affordable, even 5% GST would be far better than the current 18% and would constitute noteworthy savings while also helping insurance companies and intermediaries to make up their costs.

C.R. Vijayan, former secretary general of the general insurance council, said the reduction or exemption of GST on health and life insurance products will benefit customers by way of reduction in premium. "But the real benefit will only flow if GST exemption or cuts on products are also aligned with similar cuts or exemption on GST on insurance servicing and administration charges that are also loaded into premium," he added.

Insurers welcome the move

Broadly, though, insurance companies, which have sought GST cuts on health insurance for long, have welcomed the development.

"The proposal has potential to boost growth in the sector," said Alok Rungta, managing director and CEO of Generali Central Life Insurance Ltd. "The benefit has to be passed on to consumers. In a developing nation like us, more affordable health and life care will boost insurance penetration."

Jude Gomes, MD & CEO Ageas Federal Life Insurance Co. Ltd. said insurance is an essential safety net for families, and called the looming GST cut a customer-centric move. At the same time, he said that "it is essential that we tackle some of the structural issues like the inverted duty structure that still affects industry efficiency and margins".

Welcoming the development, Sharad Mathur, managing director and CEO of Universal Sompo General Insurance Ltd. said it sends a strong signal about the government's commitment to long-term financial resilience and inclusive growth. "If implemented, this exemption could encourage higher insurance penetration and support a more robust risk management culture across the country," said Mathur.

"Lower premiums will encourage families and individuals to purchase higher covers, increase penetration in first-time buyers, rural households, and MSMEs, and grow long-term savings and retirement planning," said Bharindwal of IBAI.

Other GST changes

Meanwhile, the finance ministry said in a social media update that finance minister Nirmala Sitharaman addressed the ministerial groups reviewing proposals on health and life insurance, tax rate rationalisation and the future of GST compensation cess.

Chaudhary said a separate GoM on broader GST rate rationalisation, which too he is convenor of, will examine the proposals on tax rate revision on Thursday.

The proposals to that ministerial group from the central government include doing away with the 12% GST slab and shifting most of the products and services to the 5% slab. It is also recommended to do away with the 28% slab and shift many of the products to the 18% slab.

A new 40% slab will be introduced that will apply to select sin goods such as tobacco and some high-end sports utility vehicles, which currently have an overall tax liability of 48% to 50% including a cess.

The effect of these proposals would be a sharp reduction in the tax burden on many commonly used products like packaged food items as well as on automobiles.