The all-powerful GST Council, headed by Finance Minister Nirmala Sitharaman, announced a slew of indirect tax reform measures last night, dubbing them ‘Next-Gen GST reforms’. One of the much-expected announcements was – the decision to scrap 18% GST on health and life insurance premiums. As promised by Prime Minister Narendra Modi, the announcement looks like a big “Diwali gift” for policyholders.
At first glance, it promises cheaper insurance and lower costs. But experts warn that the move could backfire. With insurers losing out on input tax credit (ITC), they may pass on the extra burden to customers — which means your actual premium might actually increase instead of falling.
In the 56th GST Council meeting, 18% GST on health and life insurance premium has been completely removed, effective 22 September 2025.
The government’s decision to exempt health and life insurance premiums from GST has been projected as a progressive step aimed at reducing financial burdens on individuals and encouraging wider insurance penetration in the country.
“At first glance, this appears to be a welcome relief, particularly for middle-class families and senior citizens, who often find health insurance premiums prohibitively expensive. However, a closer examination of the tax mechanics reveals that the outcome may not be as consumer-friendly as it initially seems,” says Dinesh Jotwani, Co-Managing Partner, Jotwani Associates.
Under the earlier regime, insurers levied 18% GST on premiums but were able to claim Input Tax Credit (ITC) on the taxes paid for goods and services used in their operations. This covered expenses such as IT and digital infrastructure, customer acquisition, advertising, third-party services, and even medical testing tie-ups.
How can ITC play a spoilsport for consumers expecting a premium relief
The ITC framework ensured that tax was levied only on the value addition by the insurer, thereby maintaining neutrality across the supply chain. With the new exemption in place, insurers are now barred from availing ITC, meaning that all GST paid on their operational inputs becomes a part of their cost base.
Whether this relief will be real and whether policyholders will fully benefit from it is still under debate. Let us understand in detail —
How much tax had to be paid on the premium earlier
Till now, if a customer had to pay an insurance premium of Rs 100, then he had to pay a total of Rs 118. This included Rs 100 premium and Rs 18 GST.
After this tax exemption, the customer will now have to pay only the premium. That is, now only Rs 100 will have to be paid on a policy of Rs 100. All individual insurance policies like term insurance, family floater health insurance and ULIP will come under the purview of this exemption.
This shift raises a practical and ethical question: how much of the GST exemption should be passed on to policyholders?
For service companies like insurers, ITC typically represents only a small fraction of the total GST collected from customers. Therefore, if insurers act responsibly, they should reduce premiums only to the extent of the ITC that is no longer available to them, thereby balancing the equation.
“In such a scenario, insurers recover their costs while consumers still benefit from a modest reduction in premiums. This approach creates a win-win situation, but its success ultimately depends on how transparently and fairly the industry implements the exemption,” Jotwani said.
Purpose of GST exemption
The insurance sector has been demanding for a long time that the tax burden should be reduced to make insurance accessible to the general public. The government also believes that if insurance is cheaper, more people will buy health and life policies, which will increase insurance coverage and strengthen financial security.
The government is presenting this decision as a “Diwali gift” and it is being considered a step towards comprehensive tax reforms.
Why is input tax credit (ITC) important?
This is where the matter gets a little complicated.
Insurance companies pay GST on their daily expenses – such as office rent, agent commission, marketing expenses. Till now, companies used to adjust the GST paid on these expenses in the form of input tax credit. That is, they used to deduct the tax on their expenses from the tax they collected from the customers and deposit the rest to the government.
For example, if an insurance company charges a premium of Rs 100, the customer is currently paying a total of Rs 118 (Rs 100 + Rs 18 GST). Now suppose, the company is spending Rs 50 out of the Rs 100 premium collected on other expenses and pays Rs 9 as tax. In this case, the company is actually liable to deposit only Rs 9 to the government by deducting Rs 9 from the GST collected on Rs 100 premium.
What happens now when GST has become zero?
After the removal of GST, companies will not charge any tax to customers. That is, they will not even get a chance to adjust ITC. In such a situation, the tax paid on their expenses (e.g. Rs 9) will become their additional burden. In essence, the customer is ending up paying less than what they used to pay, but the actual premium amount would go up if the insurer passes on the additional tax burden to the customer.
In the real-world scenario, however, the implication of the move would depend on how individual insurers adjust the tax burden in the absence of ITC.
Insurance companies may or may not put this burden on customers. For example, if a customer pays a premium of Rs 100, then the company can add about Rs 9 extra due to non-receipt of ITC. In such a situation, the total actual premium of the customer can be Rs 109, which is Rs 9 higher than what people actually think.
Summing up…
At first glance, GST exemption looks like a relief for consumers. But insurance companies will no longer get the benefit of input tax credit. In such a situation, they can pass on their expenses to the customers. The result will be that the insurance premium will not decrease as much as consumers are thinking.