The recent Goods & Services Tax (GST) restructuring exempted individual life and health insurance premiums, delivering clear savings for policyholders. However, GST 2.0 as it has been called, also removed insurers’ Input Tax Credit (ITC) on expenses such as agent commissions. Insurance companies have simply responded by passing on the burden to agents — forcing them to pay 18% of their agent commissions as GST. This usdden loss of nearly a fifth of income has come as a severe shock to lakhs of agents who sell these policies.
Immediate repercussions
Insurance agents and their associations, such as the General Insurance Agents Federation Integrated (GIAFI) have warned of serious downstream effects, urging regulators for corrective steps. Agent bodies are preparing representations to the IRDAI and Finance Ministry, asking for mitigation measures.
Agent Income and Morale | Commission cuts have hurt the take-home pay of independent agents and small distributors, particularly in small towns and rural areas. With reduced pay, agents may be demotivated and eventually leave the industry, shrinking companies' field presence. |
Pivot to bancassurance or digital | Insurers are shifting to selling directly online or through bank branches. This reduces the role of in-person advisory by agents, which has been critical for onboarding first-time customers with low financial literacy. |
Insurer's margins | Firms must rework their expense structure to offset ITC loss. Those not wanting to damage agent relations will have to find ways to cut other costs or raise product prices. |
Long-term effects
Loss of market |
|
Industry changes |
|
Why does this matter?
In India’s insurance ecosystem, agents are not just salespeople but also the primary educators:
- explaining product features
- helping customers with documentation and claims
- expanding reach into under-served markets.
The sudden reduction in agent income due to the removal of ITC will accelerate their migration out of this business, to find more viable income sources. This may have been intended (or not) to promote digital and bancassurance channels for insurance, further policy clarifications will surely be forthcoming.
For insurers, this change is a double-edged sword. While they face the real costs of removed ITC, they cannot alienate distribution capacity. Several private insurers have adjusted commission structures to pass the GST benefit to customers. However trimming agent payouts is neither pragmatic nor profitable in the long term, however it may appear in the short term.
In the near term, lower premiums are a win for policyholders, but the long-terms risks will mount. Agent attrition will cause product awareness and on-ground support to weaken. This risks leaving low-income, low-literacy customers outside insurance cover - which will eventually cause premiums to rise for everybody.
Regulators will have step in to address the tax treatment of commissions, or firms will have to redesign compensation structures to keep up agent morale and relations. A simple policy option will include targeted GST relief for commissions, to preserve consumer gains while preventing market erosion.
Keywords: GST insurance exemption 2025, agent commissions cut 2025, insurance distribution India, Input Tax Credit insurance agents, GIAFI response GST, insurers cut commissions 18%, mpact of GST on insurance agents, insurance penetration rural India, IRDAI GST commission relief, health insurance GST exemption effects
