GST exemption on insurance: Why Input Tax Credit loss worries insurers and what it means for your policy cost

The government’s decision to exempt health and life insurance premiums from the 18 per cent Goods and Services Tax (GST), effective September 22, 2025, has been welcomed as a big step toward affordability. For individuals, this could mean immediate savings of 12–15 per cent on premiums, making protection more accessible to middle-class and underprivileged households. But behind the cheer lies a new challenge for insurers: the loss of Input Tax Credit (ITC).

What is Input Tax Credit, 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. 

As per the Finance Ministry's FAQs, 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.

Now that individual policies are exempt from GST, insurers will no longer be able to claim ITC on such expenses. According to industry executives, this could raise their cost base by 3–5 per cent. To bridge the gap, some insurers may nudge up base premiums, even though the overall cost for customers will still be lower than under the old system.

Rohit Boda, Group Managing Director at J.B. Boda Group, explained: “While much of the GST exemption benefit will reach policyholders, the loss of ITC on business expenses will lead insurers to retain part of that benefit, or raise tariffs slightly to offset the shortfall.”

Who will be impacted most?

Kotak Institutional Equities notes that insurers like Niva Bupa may face a sharper hit due to higher operational expenses and reinsurance reliance, potentially needing tariff hikes of 4 per cent. Star Health and Care Health may require smaller increases, around 2 per cent.

Though reinsurance services will also be exempt from GST, other operational services will continue to attract tax without ITC offset, creating margin pressure. The government’s decision not to notify inverted tax structure (ITS) benefits for exempt policies limits options further.

For life insurers, brokerage CLSA estimates that the GST exemption, combined with ITC loss, could dent embedded value by up to 1.5 per cent. While the impact on new policies can be managed through pricing and commission tweaks, the drag on existing “backbooks” will be harder to offset.

How much will your insurance policy cost now?

Before the exemption, a Rs 15,000 annual health insurance premium ended up costing Rs 17,700 with GST. From September 22, the same policy will cost closer to Rs 15,000. However, if insurers raise tariffs by 3–5 per cent to make up for ITC loss, the final price may settle around Rs 15,450–15,750.

Similarly, a term life policy priced at Rs 25,000 annually, which earlier cost Rs 29,500 with GST, could now fall back to Rs 25,000. But after potential tariff adjustments, the actual bill could rise slightly, to around Rs 25,750.

Ankit Agarwal, CEO of InsuranceDekho, sees the shift as a demand booster: “This lowers the entry barrier for millions who remain uninsured. It’s a behavioural nudge that will encourage more families to prioritize protection.”

Relief with caveats

Despite these concerns, the overall direction is viewed as positive. Narendra Bharindwal, President of the Insurance Brokers Association of India (IBAI), called the GST exemption “a step forward in favour of policyholders and society at large,” especially for senior citizens and middle-income families. But he acknowledged that standalone health insurers would face ITC challenges, eventually raising premiums modestly.

Retail health premiums grew 12 per cent in FY2025, slower than in previous years. Analysts believe the GST cut could help revive demand, but warn that its net effect will depend on how quickly insurers adjust tariffs and how customers respond during the “free-look” cancellation period.

In short, policyholders will save thousands of rupees annually thanks to the GST exemption, but not the full 18 per cent. The final benefit will depend on how insurers balance affordability with the new financial pressure from losing input tax credits.