GST exemption cuts insurance premiums by up to Rs 3,050, actual savings may average to Rs 900; check details
Health and life insurance premiums are exempt from the 18% Goods and Services Tax (GST), bringing relief of up to Rs 3,050 per policy. However, with insurers losing input tax credit benefits, the actual savings for customers may average closer to Rs 900.
- Sep 23, 2025,
- Updated Sep 23, 2025 1:56 PM IST
The government’s new simplified Goods and Services Tax (GST) structure, which places most goods and services under two slabs, 5% and 18%, kicked in on Moday. A key highlight is the exemption of GST on individual life and health insurance premiums, a move Prime Minister Narendra Modi described as a “savings festival” for citizens in his Navratri-eve address. The decision was taken at the 56th GST Council meeting earlier this month, bringing much-needed relief to households that have long complained of high insurance costs. Until Sunday, premiums attracted an 18% GST, making policies significantly more expensive. Effective September 22, all individual life and health insurance policies—such as term plans, family floater health covers, unit-linked insurance plans (ULIPs), reinsurance services, and critical illness policies—are exempt from GST.
How policyholders benefit
To illustrate, consider an annual health insurance premium of Rs 20,000 under the old system. Roughly Rs 3,050 of this went solely toward GST. With the exemption, that extra tax no longer applies, leaving a lower upfront cost for customers.
Experts believe this will encourage more Indians to buy insurance, boosting penetration in a country where coverage remains low. “As of 22 September 2025, individual life and health insurance policies in India will be exempt from GST. This will directly reduce the burden on policyholders,” said Manju Dhake, Head – Insurance Advisory Practice at 1 Finance.
The hidden hitch
However, the policy shift comes with trade-offs. While customers save on GST, insurers lose the ability to claim input tax credit (ITC) on several expenses. Earlier, insurers paid GST on costs such as agent commissions, brokerages, office rentals, and marketing services but could offset these against GST collected on premiums. With premiums now exempt, this adjustment is no longer possible.
“The removal of ITC means that insurers will bear higher operational costs, since GST on inputs becomes a sunk expense,” Dhake explained. According to tax rules, ITC reversal is mandatory for exempted supplies, except for reinsurance services.
What insurers might do next
Industry analysts expect insurers to rework pricing strategies in response to the lost ITC:
Increase base premium: To maintain margins, insurers may raise base premiums at renewal cycles.
Cost optimisation: Companies could cut administrative costs, renegotiate commissions, or increase digital adoption.
Partial absorption: Some insurers may choose to absorb part of the burden to stay competitive in price-sensitive segments.
Regulatory oversight from the Insurance Regulatory and Development Authority of India (IRDAI) will also influence how much of these costs can be passed on to customers.
What it means for customers
For now, policyholders are likely to see a net reduction in premium outgo, though not as large as the entire GST portion. In the earlier example of a Rs 20,000 policy, the removal of GST theoretically saves Rs 3,050. But if insurers raise base premiums to cover the lost ITC — estimated at around Rs 2,100 in this case—the actual savings could narrow to about Rs 900 per year.
That still represents a 4–5% reduction compared to the pre-change premium, but it falls short of the headline GST cut.
Takeaway for policyholders
The exemption of GST on insurance premiums is a major consumer-friendly move that could nudge more people toward buying health and life cover. Yet, the industry faces the challenge of absorbing or passing on higher input costs due to the ITC restriction. For policyholders, the festive season brings some relief in premium costs, but the ultimate benefit will depend on how insurers balance their books in the months ahead.
The government’s new simplified Goods and Services Tax (GST) structure, which places most goods and services under two slabs, 5% and 18%, kicked in on Moday. A key highlight is the exemption of GST on individual life and health insurance premiums, a move Prime Minister Narendra Modi described as a “savings festival” for citizens in his Navratri-eve address. The decision was taken at the 56th GST Council meeting earlier this month, bringing much-needed relief to households that have long complained of high insurance costs. Until Sunday, premiums attracted an 18% GST, making policies significantly more expensive. Effective September 22, all individual life and health insurance policies—such as term plans, family floater health covers, unit-linked insurance plans (ULIPs), reinsurance services, and critical illness policies—are exempt from GST.
How policyholders benefit
To illustrate, consider an annual health insurance premium of Rs 20,000 under the old system. Roughly Rs 3,050 of this went solely toward GST. With the exemption, that extra tax no longer applies, leaving a lower upfront cost for customers.
Experts believe this will encourage more Indians to buy insurance, boosting penetration in a country where coverage remains low. “As of 22 September 2025, individual life and health insurance policies in India will be exempt from GST. This will directly reduce the burden on policyholders,” said Manju Dhake, Head – Insurance Advisory Practice at 1 Finance.
The hidden hitch
However, the policy shift comes with trade-offs. While customers save on GST, insurers lose the ability to claim input tax credit (ITC) on several expenses. Earlier, insurers paid GST on costs such as agent commissions, brokerages, office rentals, and marketing services but could offset these against GST collected on premiums. With premiums now exempt, this adjustment is no longer possible.
“The removal of ITC means that insurers will bear higher operational costs, since GST on inputs becomes a sunk expense,” Dhake explained. According to tax rules, ITC reversal is mandatory for exempted supplies, except for reinsurance services.
What insurers might do next
Industry analysts expect insurers to rework pricing strategies in response to the lost ITC:
Increase base premium: To maintain margins, insurers may raise base premiums at renewal cycles.
Cost optimisation: Companies could cut administrative costs, renegotiate commissions, or increase digital adoption.
Partial absorption: Some insurers may choose to absorb part of the burden to stay competitive in price-sensitive segments.
Regulatory oversight from the Insurance Regulatory and Development Authority of India (IRDAI) will also influence how much of these costs can be passed on to customers.
What it means for customers
For now, policyholders are likely to see a net reduction in premium outgo, though not as large as the entire GST portion. In the earlier example of a Rs 20,000 policy, the removal of GST theoretically saves Rs 3,050. But if insurers raise base premiums to cover the lost ITC — estimated at around Rs 2,100 in this case—the actual savings could narrow to about Rs 900 per year.
That still represents a 4–5% reduction compared to the pre-change premium, but it falls short of the headline GST cut.
Takeaway for policyholders
The exemption of GST on insurance premiums is a major consumer-friendly move that could nudge more people toward buying health and life cover. Yet, the industry faces the challenge of absorbing or passing on higher input costs due to the ITC restriction. For policyholders, the festive season brings some relief in premium costs, but the ultimate benefit will depend on how insurers balance their books in the months ahead.