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Banking and NBFCs - GST 2

ICICIdirect Research 22 Aug 2025 DISCLAIMER

For banks and NBFCs, the impact is expected to be largely second-order. While the 18% GST rate on most lending services is likely to be retained, rationalization of rates on select financial products could expand cross-sell opportunities, bolstering fee-based income. Within the NBFC space, auto financiers and retail-focused players appear relatively better positioned to capture the upswing.
Insurance, however, stands out as a direct beneficiary of GST 2.0. A reduction in GST on term insurance from 18% to 5% (or exempted category) would significantly advance the policy objective of “Insurance for All”, boosting penetration and premium growth in this high-margin segment with positive implications for VNB margin trajectory.
Similarly, rationalization or removal of GST on health insurance could materially improve affordability, sustaining robust growth for standalone health insurers. Multi-line insurers are poised to benefit disproportionately from the twin engines of health insurance expansion and revival in auto volume.
That said, the reform’s biggest ambiguity lies in Input Tax Credit (ITC) as GST exemption aims to reduce costs for policyholders, it could inadvertently raise insurers’ operating expenses if ITC is lost. This paradox makes execution and regulatory oversight critical to ensure that the intended benefits are effectively passed on to end-consumers.
Headroom getting created for further rate cuts – A number of food and non-food items will see a decline in GST rate from 12% to 5% while others like CD, auto will see decline from 28% to 18%. Around 8% of the CPI basket (3.2% in Food and 4.8% in Core) should see a price decline of around 6-8% which implies a reduction of ~50bps in CPI. New series from January 2026 likely to reduce weight of food and beverages by around 5% from current 45.9%. This will further aid in lowering inflation projection. RBI current projection is very high at 4.4% for Jan-Mar and 4.9% for Apr-June. Inflation forecast may be reduced in coming policy meetings and the same may open up space for further rate cuts of 25-50bps.

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