GST on health and life insurance premiums reduced to zero: See how it will impact your policy costs

GST on individual health and life insurance premiums has been reduced to zero in the 56th GST Council meeting, which took place today. This will come into effect starting September 22, 2025.

The council has completely done away with GST on insurance premiums, which currently stands at 18%.
At present, if a policyholder pays Rs 100 as a premium towards buying an insurance policy, they actually end up making a payment of Rs 118 (Rs 100 + Rs 18 GST). However, there had been much debate on bringing down this rate to zero in a bid to make insurance more affordable for everyone and, in effect, bring down the post-GST premium for policyholders.

Going ahead, all individual ULIP plans, family floater plans, and term plans will be exempt from GST.
Read on to know more about whether zero-rate GST on health and general insurance would really be more beneficial for policyholders.

What are input tax credits, and why do they matter?

Presently, while selling us insurance, insurers collect 18% GST from us. However, they also pay GST on a host of other operational activities they undertake, such as paying agent commission, marketing, office rent, etc., to the government.

However, under the GST regime, they are allowed to adjust the tax they have paid on these activities against the tax they have collected from us (policyholders) and pay the remaining difference to the government.

So, assume that out of every Rs 100 that the insurer received as premium, they set aside Rs 40 to pay office rent, Rs 10 towards paying the office’s electricity expenses, and Rs 30 towards their agent’s commission. This brings the insurer’s overall GST expense to Rs 70 (Rs 40+Rs 30), since no GST is levied on electricity-related expenses.

Now remember, your insurer is paying 18% GST on these expenses. So, this brings the total GST paid by them on all these activities to Rs 12.6 (18% of Rs 70).

Therefore, the insurer sets off this Rs 12.6 GST liability against the GST of Rs 18 that it has collected from policyholders. After adjusting their input tax credit, their net GST liability for the insurer comes down to only Rs 5.4, which they will pay.

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What happens now if GST is zero, but ITC is not available?

In this scenario, along with zero GST on insurance premiums, there will also be no ITC available for insurers. Many experts, including Ghai, note that no ITC could potentially mean that insurers pass on the lost ITC as an additional cost to the customers. However, the impact of this will be different for each insurer, depending on their costing structure, product mix, and combination of distribution channels taken.

Let's go back to our original example. In this case, the insurers are currently left with Rs 12.6 worth of GST expense, which they cannot set off against any GST collected from policyholders, since the GST charged from customers is Rs 0. Thus, there is a possibility that health insurers may pass on this Rs 12.6 as an extra cost to the end consumers, thereby bringing the potential total premium to Rs 112.6.

In essence, as compared to the present premium payable plus GST, which stands at Rs 118, under the zero-GST, zero-ITC model, the lead policyholders will have to pay a potentially comparatively lower premium, at Rs 112.6.

However, the real-world implication will depend upon the burden on each individual insurer due to the absence of input tax credit, which they are likely to pass on to their policyholders.

According to Ashwin Ghai, ex-executive director of LIC, the loading, or this extra cost passed on by insurers, would come to around 3.31% of the total premium. Thus, as Ghai explains, if the premium paid is Rs 1,000, and the additional loading due to no ITC is Rs 33.33 (3.31% of the premium), the end premium cost to the customer would come down to Rs 1,033.33.

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Ghai concurs, adding that “The zero-GST and no-ITC option results in the lowest overall cost, reducing the financial burden and even outperforming the 5% GST option. This approach not only provides the greatest economic advantage to consumers but also aligns with the fundamental principle that essential social security measures should remain tax-free. By making insurance more affordable, a zero-GST policy could enhance financial inclusion and promote greater access to critical protection for all citizens.”

Adds Samir Shah, Executive Director & CFO, HDFC ERGO General Insurance Company Limited. We are closely analysing the implications concerning the input tax credit. While it is anticipated that there will be a lowering of the premiums due to the lowering of the taxes, we are yet to understand the extent of this reduction, as this will also depend upon the availability of the input tax credit, which will become clearer over the coming days.