No GST on insurance a loss for policyholders? What the math shows

Policyholders will pay no GST on health and life premiums from September 22, but insurers lose the ability to claim tax credit on expenses like commissions, rent and software, raising their operating

The good news is that from September 22 you will no longer pay GST on health and life insurance premiums. But the bad news is that insurers will lose the right to claim input tax credit (ITC) on GST they pay for expenses such as commissions, brokerages, rent and software.

 

The Central Board of Indirect Taxes and Customs (CBIC), in a set of FAQs released on Tuesday, confirmed the change following the GST Council’s September 3 decision to exempt premiums on individual health and life policies from the current 18 per cent tax. “Services of individual health and life insurance business provided by insurers to the insured, except for group insurance, are included within the ambit of the exemption,” the CBIC said.

 

 

How the GST component works

 

To see how premiums are structured, Sharanya Tripathi, Advocate at Jotwani Associates, breaks it down:

 

Suppose you pay ₹20,000 a year for a health insurance cover of ₹15 lakh

Base premium = ₹20,000 ÷ 1.18 = about ₹16,950

GST at 18% on base = ₹3,050

Total premium = ₹16,950 + ₹3,050 = ₹20,000

 

"Until now, insurers collected GST from you and passed it on to the government. They could then offset GST paid on their own expenses—agent commissions, IT systems, advertising, reinsurance or medical tie-ups—by claiming ITC. This kept the tax chain neutral.

 

With ITC gone, that chain is broken. For example, if an insurer pays ₹10,000 in agent commission, the GST on it is ₹1,800. Earlier, they could claim this as credit. From September 22, it becomes a straight cost.

 

Returning to our ₹20,000 premium example, the headline figure may not change immediately. But insurers could gradually load the extra expense into renewal premiums. What feels like relief today may end up as higher out-of-pocket costs later.

 

From a legal and policy standpoint, this raises concerns, said Sharanya Tripathi, Advocate at Jotwani Associates. “Unless regulators step in to enforce greater pricing transparency and ensure that insurers pass on genuine tax benefits to policyholders, the GST exemption risks becoming an illusory relief. Premiums may not decrease as expected and could even rise over time due to the embedded tax cost borne by insurers,” she explained.

 

No GST, What it means for your premium

 

At first glance, premiums may look cheaper without the 18 per cent GST. But insurers now absorb unrecoverable GST on their expenses, and over time these costs could creep into renewal premiums.

 

“While policyholders will benefit from not paying GST on premiums, insurers’ costs will rise due to unrecoverable GST on distribution expenses,” said Manish Goyal, Chairman and Managing Director at Finkeda. “To balance this, insurers may marginally increase base premiums, meaning customers will still see a reduction compared to the earlier GST-inclusive pricing, but not the full 18 per cent benefit.”

 

CA Mandar Telang, Secretary of the Bombay Chartered Accountants' Society, said the real saving for policyholders may be limited. “While the GST rate reduction from 18% to nil (about 15.25% of the premium) may suggest big savings, the actual reduction could be lower, perhaps 3-6%, depending on how much ITC reversal insurers absorb,” he said.

 

 How much do you actually save in premium after 'No GST'? 

 

Telang also explained how the numbers change once ITC reversal is factored in. He said the reversal is about 1.5 per cent of the premium for endowment policies and around 7 per cent for term policies. This reduces the benefit of the GST exemption, meaning the final “net saving” is smaller than what the removal of 18 per cent GST alone suggests.

 

Endowment policy (risk premium known)

 

Premium: ₹25,000

Risk premium: ₹5,000

ITC reversal cost: ₹450

GST: ₹900

Old total: ₹25,900

New total: ₹25,450

Net saving: ₹450

 

Endowment policy (1st year, risk premium unknown)

 

Premium: ₹25,000

Risk premium: ₹6,250

ITC reversal cost: ₹375

GST: ₹1,125

Old total: ₹26,125

New total: ₹25,375

Net saving: ₹750

 

Endowment policy (2nd year, risk premium unknown)

 

Premium: ₹25,000

Risk premium: ₹3,125

ITC reversal cost: ₹375

GST: ₹563

Old total: ₹25,563

New total: ₹25,375

Net saving: ₹188

 

Term policy

 

Premium: ₹5,000

Risk premium: ₹5,000

ITC reversal cost: 7% assumed (₹0 shown)

GST: ₹900

Total after GST: ₹5,900

Saving: ₹900

 

Can insurers recover costs elsewhere?

 

Some insurers may adjust product pricing or find other ways to recover the higher operating costs.

 

“The decision to eliminate GST on insurance policies is a welcome move. However, insurance companies lose their input tax credit benefit, which previously allowed them to offset GST paid on operational expenses such as office rent and commissions. Without input credit tax, their effective operating costs will increase,” said Shilpa Arora, co-founder and chief operating officer of Insurance Samadhan.

 

“Amid these changes, insurance companies may consider adjusting premiums or restructuring products to recover higher operating expenses,” she added.

 

Adhil Shetty, chief executive of BankBazaar.com, said customers may still see more relief as competition grows. “Over the longer run, with demand picking up and competition intensifying, the likelihood of customers seeing the full benefit increases. Either way, the overall direction is potentially positive—insurance becomes more affordable, and penetration is set to rise,” he said.

 

Can insurers raise premiums after 22 Sep?

 

Yes, but only under rules set by the regulator.

 

“Insurers can increase the base premium to adapt to the increased operational cost, but not arbitrarily or mid-term. Any revision to the base premium must occur at policy renewal and comply with underwriting norms,” said Arora.

 

She added that increases are governed by the Irdai Insurance Product Regulations (2024) and the Health Insurance Master Circular. “Premiums can only be increased at the time of policy renewal,” she said.