GST on health insurance at 0%: Can policyholders get total benefit amid ITC concerns? 

Policyholders welcomed the government’s decision to reduce GST on individual health and life insurance premiums from 18% to zero, effective September 22, 2025. The move is expected to make insurance more affordable and widen coverage. But insurers are still grappling with a key question: Will the benefit actually reach customers, or will technicalities around GST rules dilute the impact?

The confusion lies in whether these premiums fall under the nil-rated or exempt GST category. At first glance, both mean no GST payable by policyholders. But the difference lies in whether insurers can claim input tax credit (ITC), which is the credit they get for GST paid on expenses such as agent commissions, rent, or marketing services.

If premiums are nil-rated, insurers can still claim ITC, lowering their operational costs and potentially passing on savings to customers. But if premiums are exempt, insurers lose ITC benefits, which raises their costs and could lead to higher premiums in the long run.

Insurers point out that they offer a mix of products. While life and health policies may now attract zero GST, other products like motor, fire, travel, and cyber insurance will continue to be taxed at 18%. If ITC credits are blocked under exemption, companies may not be able to offset them against GST collected from these taxable products, creating inefficiencies and cost pressures.

The difference matters because insurers spend a large portion of premium income on taxable services like office rent, IT systems, and professional fees. Under the exemption, part of the GST paid on these expenses becomes a cost instead of a creditable tax. This erodes profitability or forces companies to recalibrate premiums.

Standalone health insurers may be hit harder than diversified general insurers. Since they rely heavily on retail health policies, losing ITC credits could impact margins more significantly. Analysts estimate some insurers may need to raise tariffs by 3–5% to offset the additional cost, with smaller or higher-expense players likely to feel the pinch the most.

Nikhil Chopra, CBO of Medi Assist, highlighted the broader implications: “The recent GST exemption marks a landmark shift, unlocking access to quality individual health insurance at lower cost for crores of Indians. The continued 18% GST on GMC premiums continues the cash flow strain, especially on small businesses, since their budgets for employee benefits remain constrained, and provide no relief. As companies explore alternatives, we foresee a possible movement towards mix-and-match models, combining retail purchase support and group schemes based on demographics and enterprise strategy. This evolving landscape will require TPAs and insurers to adopt technology, enhance digital solutions, and define approaches to continued expansion of medical benefits covered over time."

Industry leaders, however, remain optimistic about the reform. Anand Roy, MD and CEO of Star Health and Allied Insurance, said, “The GST exemption on health insurance premiums is a landmark reform that will make protection more affordable and accessible for millions of Indians. While the reforms officially take effect from September 22, Star Health and intermediaries have come together to innovate and ensure that customers don’t have to wait. Starting now, customers can buy their health insurance policies without paying GST, with their coverage beginning from September 22. By enabling customers to lock in their protection now—well ahead of the reform date—we are removing any friction in the buying process and ensuring families remain covered without delay."

Sarbvir Singh, Joint Group CEO of PB Fintech, added, “The government’s decision to reduce GST on health and term insurance premiums from 18% to 0% is a progressive reform. While the new GST regime officially goes live on September 22, the insurance industry has come together and worked to make 0% GST for customers feasible immediately."

For now, the relief is partial, a step in the right direction. The government aims to make insurance more accessible and expand penetration, but whether policyholders see long-term benefits depends on how insurers handle ITC under the exempt category.