Assessing the Impact of GST Reforms on LIC’s Embedded Value and Growth Prospects

The Goods and Services Tax (GST) reforms of September 2025 have reshaped India’s indirect tax landscape, with profound implications for the insurance sector. For the Life Insurance Corporation of India (LIC), these reforms present a dual-edged scenario: immediate cost pressures from the loss of input tax credits (ITC) and long-term growth opportunities driven by enhanced affordability and accessibility of insurance products. This analysis evaluates how LIC’s strategic resilience and tax-efficient adaptations position it to balance short-term challenges with sustained shareholder value creation.

Short-Term Cost Pressures and Embedded Value Impact

The GST exemption on health and life insurance premiums, effective September 22, 2025, removes the 18% tax burden for policyholders but strips insurers of ITC on operational expenses such as commissions, marketing, and office rent. According to a report by Business Today, this loss is estimated to raise insurers’ cost bases by 3–5%, potentially necessitating marginal premium adjustments to offset the shortfall [1]. For LIC, the impact on embedded value—a measure of the present value of future profits from existing policies—is projected to be minimal, with the company anticipating a nominal reduction of less than 0.5% [2]. This contrasts with broader industry estimates of a 1.5% decline in embedded value due to the combined effect of GST exemption and ITC loss [1].

The disparity between LIC’s conservative projection and industry averages underscores its operational scale and pricing flexibility. As the largest life insurer in India, LIC’s ability to absorb incremental costs without significant premium hikes reflects its strategic resilience. However, smaller insurers with thinner margins may struggle to maintain profitability, creating a potential market consolidation opportunity for LIC in the medium term.

Strategic Adaptations: Cost Mitigation and Operational Efficiency

To counteract the loss of ITC, LIC and other insurers are recalibrating their cost structures. A Moneycontrol analysis highlights that insurers may pass on 3.31% of the additional costs to policyholders, partially offsetting the intended affordability gains of the GST exemption [3]. For LIC, this necessitates a delicate balance: maintaining competitive premiums while optimizing operational efficiency.

The company’s strategic adaptations include leveraging technology to reduce distribution costs and streamline claims processing. For instance, digitizing agent commissions and automating underwriting processes can mitigate the financial impact of lost ITC. Additionally, the GST Council’s simplification of tax slabs to 5% and 18%—alongside a 40% bracket for luxury goods—reduces compliance complexity, enabling insurers to reallocate resources toward innovation and customer acquisition [4].

Long-Term Growth: Affordability and Market Expansion

While the short-term cost dynamics are challenging, the GST reforms are structurally transformative for the insurance sector. By making life and health insurance more affordable, the reforms are expected to drive penetration among middle-class and senior citizen demographics. A Financial Express report notes that ICICI Prudential Life and HDFC Life anticipate non-material impacts on embedded value (<0.5%), but foresee a surge in demand for high-margin products like protection riders and term insurance [5].

For LIC, this presents a unique opportunity to capitalize on its vast distribution network and brand trust. The company’s focus on low-cost, high-volume products aligns with the government’s “Insurance for All by 2047” vision. Analysts at JM Financial project that LIC’s Value of New Business (VNB) growth could accelerate to 12–15% annually post-reforms, driven by expanded customer reach and product diversification [5].

Shareholder Value and Tax-Efficient Resilience

The long-term gains from increased policy penetration and volume growth are likely to outweigh the short-term embedded value dip. A Business Today analysis emphasizes that the GST exemption could enhance LIC’s strategic resilience by aligning its business model with India’s consumption-driven growth trajectory [1]. Furthermore, the government’s broader fiscal rationalization—such as reducing GST on automobiles and FMCG—creates a tax-efficient environment conducive to cross-sector synergies.

For shareholders, the reforms signal a shift from short-term cost accounting to long-term value creation. While embedded value may contract marginally in 2025, the projected 5–7% reduction in general insurance premiums due to auto sector GST cuts could indirectly benefit LIC’s cross-selling efforts [6]. This interconnectedness underscores the importance of viewing GST reforms through a holistic lens, where sector-wide tax efficiency amplifies individual company resilience.

Conclusion

The GST reforms of 2025 pose immediate cost challenges for LIC but unlock substantial long-term growth potential. By mitigating operational costs through digital transformation and leveraging the affordability-driven demand surge, LIC is well-positioned to strengthen its market leadership. For investors, the key takeaway is that strategic resilience—coupled with a tax-efficient operating environment—will drive sustained shareholder value, even as embedded value faces temporary headwinds. As the insurance sector adapts to this new fiscal paradigm, LIC’s ability to balance cost discipline with innovation will be critical to its success.

Source:
[1] GST exemption on insurance: Why Input Tax Credit loss worries insurers and what it means for your policy cost [https://www.businesstoday.in/personal-finance/insurance/story/gst-exemption-on-insurance-why-input-tax-credit-loss-worries-insurers-and-what-it-means-for-your-policy-cost-492746-2025-09-05]
[2] LIC anticipates a nominal impact of less than 0.5% on embedded value due to GST change [https://www.marketscreener.com/news/lic-anticipates-a-nominal-impact-of-less-than-0-5-on-embedded-value-due-to-gst-change-ce7d59d9da89f62c]
[3] lic: GST on health and life insurance premiums reduced to ... [https://m.economictimes.com/wealth/insure/gst-on-health-and-life-insurance-premiums-reduced-to-zero-see-how-it-will-impact-your-policy-costs/articleshow/123682131.cms]
[4] GST Council slashes tax slabs to two to spur consumption [https://m.economictimes.com/news/economy/policy/gst-meeting-2025-tax-reforms-changes-gst-council-slashes-tax-slabs-to-two-5-and-18-to-spur-consumption-sitharaman-led-council-announces-key-measures-for-middle-class/articleshow/123681297.cms]
[5] JM Financial's top insurance picks after GST rate revamp [https://www.financialexpress.com/market/insurance-stocks-zoom-as-gst-council-scraps-tax-on-policies-jm-financial-sees-big-shift-for-hdfc-life-max-life-3966431/]
[6] Auto GST Rate Cut Could Slash General Insurance Premiums by 7 [https://scanx.trade/stock-market-news/stocks/auto-gst-rate-cut-could-slash-general-insurance-premiums-by-7/18607513]