Insurance commission

What is insurance commission?

Insurance commission is the money an insurer pays to the agent, bank, broker or other intermediary through whom a policy was sold. It is usually a percentage of the premium. In life insurance it is split into first year commission, paid on the first year's premium, and renewal commission, paid on later premiums while the policy stays in force. In general and health insurance, commission is paid on each year's premium when the policy is sold or renewed. For brokers the payment is usually called brokerage.

The customer does not pay commission separately. It is built into the premium as part of the insurer's costs, which is why commission levels affect the price and the value customers get.

How commission is regulated in India

The law. Section 40 of the Insurance Act, 1938 allows insurers to pay commission only to agents and registered intermediaries. Section 41 forbids anyone from offering a rebate of commission or premium as an inducement to buy a policy. The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025, in force from 5 February 2026 except one section, added Section 40(2A), which lets IRDAI set by regulation the limits of any commission, remuneration or reward paid to agents and intermediaries, how it is paid and what must be disclosed.

How limits have changed.

Under the current regime, "commission" includes rewards and other remuneration, and must be paid in line with the board policy. See expenses of management.

Tax. From 22 September 2025, individual life and health insurance policies became exempt from GST. Insurers can no longer claim input tax credit on commission and brokerage, and many private life insurers cut distributor commission, reported at about 18%, from 1 October 2025, while LIC was reported not to have cut agents' commission. On the income side, as of October 2026 tax is deducted at source at 2% on commission paid to individual agents above ₹20,000 a year, under Section 393(1) of the Income-tax Act, 2025 (the successor to Section 194D of the 1961 Act).

The September 2026 proposals

IRDAI's consultation paper "Recalibrating Economics of Insurance Distribution" (23 September 2026, comments due 25 October 2026) proposes:

• product-level caps that vary by line, product complexity and channel, with lower caps for open architecture distribution entities than for agents and insurer associates;
• nil or very low caps on mandatory or near-mandatory covers, such as third party motor on new vehicles and insurance packaged with loans;
• life caps graded by premium paying term, with renewal commission that rises by 0.5% of premium every three years from the sixth policy year, to a maximum of 7%;
• extra commission on individual policies sold in cities under 10 lakh people (an additional 10% of the first-year cap) and in towns under 50,000 and rural areas (an additional 20%);
• clawback of commission on mis-sold and cancelled policies, and all-inclusive counting of incentives, trips, gifts and brand payments as commission.

The paper reports that between FY23 and FY25 distributor remuneration grew four to five times faster than the premium it was paid on. These figures and caps are from the paper as summarised by Khaitan and Co, and are proposals, not rules.

Worked example (proposed caps)

A regular premium life policy with ₹50,000 annual premium and a 10-year premium paying term:

Khaitan and Co noted that the paper does not make clear whether the renewal escalator applies to entities as well as agents.

What commission means for distribution

• Commission design drives behaviour. High first-year payouts reward volume; renewal-weighted pay rewards keeping customers. Insurers can already shift pay towards renewals and persistency within their board policy, without waiting for caps.
• Total payout matters more than the headline rate. Contests, trips, branding fees and "marketing support" are all part of the cost. The proposed all-inclusive definition and cost audits would make these visible.
• Agent income needs a plan for change. A cut in first-year commission hits new agents hardest, because they have no renewal book yet. Stipends, training allowances or slower vesting can help new agents through the first two years.
• Disclosure is coming. Agents must already disclose commission if a customer asks. The proposals would make insurers' commission policies public, and large intermediaries must publish commission data under the 2026 intermediary amendments.
• Rebating is still illegal. Passing part of the commission back to the customer to win a sale breaches Section 41, whatever the commission level.