LIC Navigates ₹1,400 Crore GST Credit Loss Through Strategic Adjustments
Life Insurance Corporation of India (LIC) has encountered a significant financial impact of ₹1,400 crore due to the loss of input tax credit following the exemption of certain life and health insurance plans from the goods and services tax (GST). This development stems from the government's decision to exempt these policies from GST, effective September 2025, which, while making insurance more affordable for consumers, has increased operational expenses for insurers by removing the input tax credit benefit.
Offsetting the GST Impact Through Operational Efficiency
Despite this substantial hit, LIC's managing director and chief executive officer, R. Doraiswamy, revealed during the company's earnings call for the October-December quarter that the insurer has largely mitigated the impact. This was achieved through a strategic increase in the share of margin-accretive non-participating policies and a comprehensive rationalization of expenditures. "Our overall expense ratio has been coming down. As a result, the impact of GST input tax credit has been subsumed into the overall expenses, which are getting rationalised. So, we are able to manage," Doraiswamy explained.
He further highlighted that the anticipated topline growth, expected to receive a boost from increased policy affordability post-GST cuts, should contribute to reducing the overall expense ratio. Additionally, there is an expectation that the value of new business margin (VNB) will see a modest improvement from current levels.
Financial Performance and Expense Management
For the nine-month period ending 31 December, LIC reported a decline in its overall expense ratio by 132 basis points to 11.65%. The value of new business (VNB) for this period surged by 28% year-on-year to ₹8,288 crore, while the net VNB margin increased by 170 basis points to 18.8%. On a consolidated basis, the life insurer posted a net profit of ₹12,930 crore for the quarter, marking a 17% increase year-on-year and a 28% rise quarter-on-quarter. For the nine-month period ended December 2025, the profit after tax stood at ₹29,138 crore, reflecting a 16.7% growth.
Commission Structure and Regulatory Compliance
In response to the Economic Survey for 2025-2026, which advocated for a reduction in commissions paid to insurance distributors and intermediaries, Doraiswamy asserted that LIC's commissions are currently at an "optimal level" and that the insurer sees no immediate need to revise its commission structure. He clarified that the recent discourse on commission payouts primarily concerns other private players and the broader sector, rather than LIC specifically.
"We are more or less at the optimum level of commission structure. But if the regulation gives some other directions, we will be fully compliant to that as well," Doraiswamy stated. He emphasized LIC's commitment to regulatory compliance, noting that any future adjustments would be in line with official directives.
Distribution Network and Open Architecture
Doraiswamy expressed satisfaction that the recent Insurance Amendment Bill did not incorporate a proposal to mandate an open architecture for insurance distribution. LIC boasts the largest insurance network in the country, with 14.72 lakh agents as of 31 December, accounting for 45.3% of total agents in the life insurance sector. He believes that avoiding open architecture ensures agents are guided by product suitability for customers rather than commission differentials, which he views as beneficial for both the country and policyholders.
Concurrently, LIC is actively expanding its bancassurance network to reduce reliance on physical agents. The share of policy distribution via bancassurance increased to 4.5% from 3.4% a year earlier, while distribution through alternative and digital marketing channels rose to 3.7% from 1.9%.
Government Divestment Plans and Stake Sale
Regarding the government's plan to divest part of its shareholding in LIC to meet public shareholding norms by FY27, Doraiswamy anticipates that the government will initiate stake offloading in tranches during the next financial year. "I am 100% sure that the government is looking at doing that in tranches in the months to come. It is a call of timing by the government," he remarked. He added that once approved, LIC may undertake preparatory activities such as investor roadshows.
The specific method of offloading—whether through an offer for sale (OFS) to the public or a qualified institutional placement (QIP)—remains to be determined, with the first tranche likely taking at least 2-3 months to materialize. The government is required to reduce its stake in LIC by 10%, of which 3.5% was divested during the insurer's IPO in May 2022.
NSE IPO and Strategic Investment
On the topic of the National Stock Exchange's (NSE) IPO approval, Doraiswamy indicated that LIC will assess the public offer's outcome before making decisions regarding its shareholding. LIC currently holds a 10.7% stake in the bourse. He noted that the IPO is expected to take another 6-7 months, providing LIC ample time to deliberate on potential stake offloading. "We continue to be a strategic investor, and we are a promoter, no doubt. So, it is a call to be taken. It is not final as of now," he concluded.
