The Government of India recently announced the Next-Gen GST Reform, described as a historic Diwali gift for the nation. Among the many revisions to tax rates, one change stands out for its implications in the sphere of financial planning: the complete removal of GST on life and health insurance premiums, bringing the tax down from 18 percent to nil. While this may be viewed primarily as a fiscal adjustment, its influence extends into the way individuals make financial decisions, especially regarding the adoption of insurance.
The decision to purchase insurance has long been shaped by what economists and psychologists describe as present bias. This is the tendency to prioritize immediate costs or rewards over long-term benefits. In practice, many individuals perceive insurance premiums as a present-day burden rather than as an investment in future protection. As a result, insurance is often delayed, reduced, or avoided altogether, despite widespread awareness of its necessity. The reform directly addresses this behavioral hurdle by lowering the immediate visible cost associated with premiums.
The implications can be illustrated through an example. Ravi, a 35-year-old IT professional, had repeatedly postponed buying health insurance because he viewed the premium as an additional, unnecessary expense. With GST removed, his annual premium fell by approximately ₹4,000. Although the saving was modest, it proved sufficient to reduce his resistance and motivated him to finally purchase a policy providing ₹10 lakh of coverage for his family. This demonstrates how a small financial nudge can shift decision-making patterns and encourage action in the direction of long-term security.
The reform matters for several reasons:
- It reduces the psychological barrier to purchasing insurance by making premiums feel less burdensome.
- It encourages wider adoption of health and life insurance among households, particularly within the middle-income segment.
- It strengthens financial resilience by ensuring that more families are protected against medical or life-related contingencies.
- It supports the broader national goal of financial inclusion and security, contributing to the vision of Aatmanirbhar Bharat.
Although external policy changes can make insurance more attractive, individuals must also adopt strategies to overcome decision-making biases on their own. Three useful approaches include reframing insurance as a form of protection rather than an expense, automating premium payments through bank instructions to avoid procrastination, and focusing forward by consciously valuing long-term security over short-term savings. Together, these strategies can help individuals take more rational financial decisions, regardless of changing tax structures.
From an academic perspective, this reform illustrates how economic policy and decision-making psychology intersect. It shows that structural incentives such as tax relief can correct behavioral distortions and align household behavior with rational financial planning. By reducing frictional costs, the government has not only offered immediate relief but also encouraged better financial preparedness in society.
In conclusion, the removal of GST on health and life insurance is more than a reduction in taxation. It represents a shift that makes insurance more affordable, addresses the barriers created by present bias, and strengthens the foundations of financial resilience in India. For households, the message is clear: with the cost barrier lowered, the most prudent step is to act without delay and secure protection for the future
Disclaimer:
This article is for educational and informational purposes only and does not constitute investment advice or a recommendation. The views expressed are based on the author’s personal research and expertise in behavioral finance and wealth management, and are not affiliated with or endorsed by any mutual fund house or financial product provider. Professor (Dr.) Meghna Dangi is not a SEBI-registered investment advisor. These are not promotional endorsements of any specific brand or financial institution.