GST removed from life, health insurance but how much will you gain?

The GST Council’s recent decision to exempt individual life and health insurance premiums from Goods and Services Tax (GST) is set to bring in some cheer for policyholders. At present, you pay 18% GST over and above the base premium, which makes protection and savings products significantly more expensive. With medical inflation running in double digits and healthcare costs rising sharply each year (see graphic), health insurance helps. Easing the GST burden will therefore reshape affordability, improve returns, and bring more Indians into the insurance net.

This change will take effect on 22 September. If you already hold a policy, your premiums will also reduce. However, the picture is not as straight as it first appears, because the move also changes how insurers manage their costs and margins.

Savings not as expected

At first glance, removing GST appears to be a straightforward win for you. If you earlier paid Rs.1,180 on a Rs.1,000 premium (after including 18% GST), you will now only pay Rs.1,000. However, as former LIC member Nilesh Sathe explains, insurers used to claim input tax credit (ITC) on expenses such as agent commissions, electricity, reinsurance, outsourcing and administrative costs. For example, if Rs.150 was allocated for expenses, they could claim around Rs.27 as ITC. Once GST is exempted, insures lose this benefit.

That leaves insurers with two choices: either absorb the loss by trimming their profit margins, in which case you gain the full 18% reduction, or raise the base premium from Rs.1,000 to Rs.1,027, meaning you still save, but closer to, say 15%. Which route insurers take depends on market dynamics. Term insurance, for instance, is a fiercely competitive segment where even slight price hikes can result in a loss of market share. In such cases, companies may prefer to live with thinner margins rather than risk losing customers. Either way, you still benefit.

Rising cost of critical care over the years

Health insurance cushions your finances against today’s soaring medical bills.

Samir Shah, Executive Director and CFO, HDFC ERGO, calls it a step that perfectly aligns with IRDAI’s ambition of achieving “Insurance for All by 2047.” Lowering the cost barrier, he believes, directly improves accessibility and should bring health coverage within reach of a much larger population.

Better claim settlement

According to Coversure Founder and CEO Saurabh Vijayvergiya, the exemption could also impact the overall risk pool and future claims. Insurance relies on pooling risk across different types of policyholders. If premiums fall, younger and healthier customers may be tempted to buy coverage. Their entry can balance portfolios that are otherwise tilted towards older, higher-risk individuals.

For example, a health insurance book made up largely of people above 45 will usually see higher claims than one which includes a fair share of 25-30-year-olds. By spreading risk more evenly, lower premiums may help make the claims experience more manageable for insurers and sustainable for customers. “Affordability encourages more people to join the pool, which in turn strengthens the insurer’s ability to honour claims,” says Vijayvergiya.

Boost in savings

If you hold traditional life insurance savings products, such as endowments, guaranteed return plans, or ULIPs, the benefit may not be reflected in lower premiums, but rather in higher returns. Earlier, if you invested Rs.1 lakh in such a policy, a part was lost to GST. With GST gone, the entire Rs.1 lakh gets invested. Over time, this directly boosts your maturity values and internal rates of return.

Given that such products form the bulk of India’s insurance industry, especially within LIC’s portfolio, the effect is substantial. Even if you are already locked into a longterm plan, your returns could now improve. It is also important to note the exclusions. If you are covered by a group insurance policy from your employer, this exemption does not apply. The relief is strictly for individual policies purchased for yourself or your family.

It all depends on insurers

The real test of this reform lies not in the GST Council’s announcement but in how insurers recalibrate their cost structures. Distribution expenses, commissions, solvency margins, and administrative overheads all contribute to pricing, and the loss of ITC alters the arithmetic for every company differently. A large insurer with deeper pockets may absorb the hit and keep your premiums attractive, while a smaller one may be forced to pass on more of the cost.

This makes transparency crucial. Unless insurers clearly spell out how the exemption is being reflected in your premium, you may not know whether you are receiving its full benefit. Regulators, too, may need to step in to ensure that the intent of the exemption—to make insurance more affordable—is not diluted by opaque repricing. For now, you can be hopeful, but not complacent. The promise of cheaper insurance and higher returns is real, yet the exact benefit will only become clear once insurers reveal their revised pricing.