GST changes: Policyholders gain on nil  GST, insurers worry over input tax credit loss

In a landmark decision, the Goods and Services Tax (GST) Council has scrapped GST on all individual health and life insurance policies. Effective from September 22, the exemption applies to term life, unit-linked insurance plans (ULIPs), endowment policies, family floater health covers, and senior citizen plans. Reinsurance linked to these policies has also been exempted.

What will change?

Until now, premiums have attracted varying GST rates. Health insurance, ULIPs, and term life were taxed at 18%, while endowment policies carried 4.5% GST on the first premium and 2.25% on renewals. Single premium annuity policies were taxed at 1.8%. 

Health insurance – 18%

Life insurance ULIPs – 18%

Term life insurance – 18%

Endowment policies (first premium) – 4.5%

Endowment policies (regular premium) – 2.25%

Single premium annuity policies – 1.8%

With the new notification, none of these products will carry GST, marking a complete shift in the taxation of retail insurance.

Premiums to fall

The most immediate impact is on affordability. For instance, a health insurance policy with an annual premium of Rs 10,000 currently costs Rs 11,800 after GST. Now, the same policy will cost only Rs 10,000. Brokerage firm CLSA estimates that if insurers fully pass on the benefit, premiums could fall by up to 15%, making protection more accessible to households.

Lower upfront costs are expected to encourage first-time buyers, enable existing customers to expand their coverage, and help reduce India’s wide protection gap—particularly in health insurance, where penetration remains well below global levels.

Welcome move

Tax experts have described the decision as a significant consumer-friendly reform. Smita Singh, Partner at S&A Law Offices, called it “a welcome step towards making insurance more accessible and affordable for the common man.”

Hanut Mehta, CEO and Co-Founder at BimaPay Finsure, highlighted the affordability aspect. He noted that lower entry costs would attract more first-time buyers and encourage higher sums insured, while premium financing firms would see new opportunities as policy sizes shrink with the removal of GST. However, he cautioned that insurers losing input tax credit could eventually feed higher costs into premiums.

CA Ruchika Bhagat, MD of Neeraj Bhagat & Co., described the reform as “landmark,” pointing out that it makes long-term protection and wealth planning more accessible while particularly easing the burden on households and elderly citizens who face higher medical costs.

Input Tax Credit

While customers stand to gain, insurers face a challenge. With GST gone, companies can no longer claim Input Tax Credit (ITC) on expenses such as office rent, commissions, IT systems, and claims processing. This could increase operational costs by 5–7%.

Although reinsurance has also been exempted, it typically accounts for only 30–35% of insurer expenses, and many retail policies are not reinsured at all. Analysts warn that insurers may eventually raise premiums by 3–4% to protect margins, reducing the overall benefit for policyholders.

Insurance companies are cautiously optimistic. Health insurer Niva Bupa has said there will be no immediate hikes, though the lack of ITC creates uncertainty on how to manage costs.

Samir Shah, Executive Director and CFO of HDFC ERGO General Insurance, said the industry is still analysing the changes: “It is anticipated that there will be lowering of premiums due to lowering of taxes, but the extent will depend on the availability of input tax credit, which will become clearer over the coming days.”

Industry experts believe insurers may absorb costs in the short term, but pricing models could be recalibrated over time if margins come under pressure.

For policyholders, the GST exemption is a clear win, reducing premiums and making coverage more affordable. However, the long-term benefit depends on how insurers adapt to the loss of ITC. If savings are passed on fully, customers will enjoy meaningful price cuts. If not, part of the relief may be offset by gradual premium adjustments.