GST on health, life cover: Policyholders to benefit from zero rate, insurers brace for ITC impact

In a major relief for individual policyholders, the Goods and Services Tax (GST) Council announced on September 3, 2025, that all individual health and life insurance premiums would no longer be subject to GST. Finance Minister Nirmala Sitharaman confirmed that GST on these premiums will be reduced from 18% to zero, while reinsurance costs linked to these policies have also been exempted.

The move is expected to make premiums immediately cheaper for customers. Annual policies, which constitute the majority of insurance contracts, will reflect the benefit at the time of renewal, allowing policyholders to save directly from September 22 onward.

However, insurers face operational challenges as they will no longer be able to claim Input Tax Credit (ITC) on expenses such as reinsurance, agent commissions, marketing, office rent, and claims processing. This could raise net operational costs by 5–7%. Analysts at CLSA caution that insurers may eventually increase premiums by 3–4% to maintain margins, even as customers benefit from the GST reduction.

ITC  impact

Speaking to Business Today TV, Dr Tapan Singhel, MD & CEO of Bajaj Allianz General Insurance and Chairman of the General Insurance Council, explained: “An immediate drop of 18% becomes zero from September 22. Most policies are annual, so when they come up for renewal, customers will immediately benefit from the zero percent GST regime. Policies already purchased are unaffected since GST has already been paid, but every new policy and renewal will reflect the zero GST benefit.”

Health insurers such as Niva Bupa confirmed that there will be no immediate premium hikes, as they aim to pass on the benefits to policyholders. However, the company noted uncertainty around ITC and how to manage costs beyond reinsurance. This means insurers may need to absorb part of the additional cost or share it with distributors in the near term.

Under the previous GST system, insurers collected 18% GST from policyholders and could offset this against tax paid on operational activities through ITC, paying only the net balance to the government. With GST on premiums reduced to zero, ITC is no longer available, creating a potential cost impact.

Singhel highlighted a mitigating factor: “Hospitals have also received GST relief. They are expected to pass on the exemption to patients, which can reduce claim ratios. This offsets the potential loss from ITC and allows insurers to pass the full benefit directly to consumers.”

ITC FAQs

Which health insurance policies are included in the GST exemption list?

The policies covered under the GST exemption are all individual health insurance plans, including senior citizen and family floater plans, and reinsurance of such plans.

What are input tax credits (ITC), and why does it matter?

Insurers, while selling insurance plans, collect 18% GST from buyers. These insurers also pay GST to the government on a host of operational activities, such as agent commission, marketing, office rent, etc.

However, under the GST regime, insurers are allowed to adjust the tax they have paid on these activities against the tax they have collected from the policyholders, and pay the remaining difference to the government.

What will happen if GST is zero, but ITC is not available?

In this scenario, along with zero GST on insurance premiums, there will also be no ITC available for insurers. Ashwin Ghai, ex-director of LIC, says that no ITC could potentially mean that insurers pass on the lost ITC as an additional cost to the customers.