GST exemption on insurance: Policyholders might gain despite likely base premium hikes in future

Insurance-seekers can defer fresh health insurance purchase to September 22, but pay renewal premiums by due date to prevent break in coverage

The great Indian GST (Goods and Services Tax) reset is now underway. From September 22, Goods and services will either be GST-exempt or attract tax at the rate of 5 percent, 18 percent, and 40 percent (for ‘sin’ goods).

Acknowledging the need for reducing GST on something as critical as life and health insurance, the government has decided to exempt this category entirely. Currently, the GST rate on term and health insurance is 18 percent. However, this does not automatically mean that the policyholders will get the entire benefit of nil GST.

Here’s a guide to understanding the implications of GST 2.0 for policyholders and investors:

Life and health insurance premiums are not exempt from GST. Will premiums become cheaper?

This is the biggest question on the minds of individuals. Insurers say they will be unable to claim input tax credit and thus offset GST paid on their operational expenses, including administrative and marketing spends. This will push up their overall costs, they argue.

Broking firms say that the companies will have to raise their premiums to offset the loss of ITC. International brokerage CLSA, for example, expects insurers to hike base premiums by 1-4 percent. “Although it is anticipated that reduction of the tax element will translate into lower premiums, the actual benefit can only be assessed after clarity on the input tax credit, which we will come to know over the coming days,” Anuj Tyagi, MD and CEO, HDFC ERGO General Insurance, said.

Not being able to claim ITC could have some adverse impact on insurers. “It may result in about 3 percent loss of revenue for new sales, but the major impact on insurance companies will be on existing policies, as their premiums cannot be increased under the plea that ITC is not available. Some insurers may absorb this loss while some may partially pass on the loss of revenue to policyholders by increasing premiums on new plans,” former Insurance Regulatory and Development Authority of India (IRDAI) member Nilesh Sathe said in his LinkedIn post.

Will insurers pass on the entire GST cut benefit to policyholders?

So, the final benefit to customers will depend on the insurers’ approach; some may pass on the ITC loss, but others feel the government and IRDAI could make sure that the companies absorb the same.

Policyholders might see higher savings on premiums, but the extent of the benefit is a grey area due to the input tax credit hiccup. According to chartered accountant Nitesh Buddhdev, Founder, Nimit Consultancy, policyholders’ outgo will be lower, but not by 18 percent.

“For example, let’s say the base premium is Rs 20,000. An 18 percent GST means that the policyholder’s outgo is Rs 23,600 at present. Insurers’ operational expenses are Rs 5,000, on which GST amounts to Rs 900. Pre-GST exemption, this Rs 900 could be claimed back via ITC. With nil GST, however, insurers will lose ITC worth Rs 900. So, the effective new premium will be Rs 20,900,” he said. That is, policyholders could save Rs 2,700 instead of Rs 3,600 due to the GST exemption from September 22.

Narendra Bharindwal, President, Insurance Brokers’ Association of India (IBAI) believes that the move will make medical insurance affordable for all, particularly senior citizens, for whom health coverage is critical. While input tax credit dominates the discussions, in the case of health insurance, other factors could carry greater weight. “There are several other factors that play a role in raising the premiums -- healthcare inflation and also customers’ behavioural patterns due to the availability of policies with no room rent capping. This can lead to adverse claim experience for insurers, which, in turn, could push up the premiums,” he says.

Insurers and policyholders will now have to await clarity from the Insurance Regulatory and Development Authority of India (IRDAI) in the form of detailed guidelines on the rollout of this measure.

"Exempting the individuals' health and life insurance policy premiums from the levy of GST altogether is a naturally well-intended measure. But, to pass on this benefit to the end consumers, two things further need to be done. Firstly, just like we have savings clause of section 536 in the new Income Tax Act, 2025, a similar savings clause should now be inserted in the GST Act, to provide that eligible ITC credit available as on September 21, 2025, will continue to remain eligible and available either for adjustment against output tax liability or refunds,” said Mayank Mohanka, Founder-director, TaxAaram.com, a chartered accountancy firm.

He believes a merit rate of 5 percent to enable the insurers to claim ITC on their input costs would have been more practical. “Alternatively, the existing window of refunds on zero-rated goods u/s 54(6) should be extended to cover all refunds arising on account of inverted duty structure, including exempted goods and services as well,” he says.

Also read: GST exemption on health and life insurance: Will premiums actually become cheaper?

Should policyholders postpone their fresh health insurance policy purchases until September 22?

Since the new GST structure will come into effect from September 22, insurance-seekers can consider deferring fresh health policy purchases to benefit from the lower rate.

Does it make sense to wait until September 22 to renew existing insurance policies?

Some health insurance policyholders whose renewal is due before September 22 might be tempted to wait and pay the premiums during the grace period to avail of the new GST rates. However, this is not a sound strategy. “Ideally, you should renew your policy now. Any delay, even for a day, can leave you without coverage and expose you to unexpected medical expenses. Health emergencies come without warning, so it’s always better to stay protected rather than wait for short-term savings,” says Amit Chhabra, Chief Business Officer, Policybazaar.com.

What about life insurance purchase and renewal?

In the case of life insurance policies, there is a view that companies that do not want to absorb the ITC loss could hike base premiums for new policies. This is because life insurance policies carry level premiums that cannot be revised in future years. Older policyholders will get the complete benefit of GST exemption, while new policyholders might see increased premiums, depending on the insurer’s decision on absorbing or passing on the ITC loss.

Also read: Ulips with annual premiums of over Rs 2.5 lakh to be taxed like equity MFs

Will the GST exemption on endowment, ULIPs give them an edge over mutual funds?

As a prudent financial planning strategy, it’s best not to mix investments and insurance. Financial planners recommend buying a large term insurance cover to protect your dependents financially in your absence and investing through mutual funds for long-term wealth creation.

However, some high-net-worth investors (besides some gullible individuals) do buy endowment and Ulips to take advantage of the tax exemption on maturity proceeds under section 10(10D), subject to certain caps.

Given this tax benefit and now GST reduction, it is possible that insurance agents could use this as a key selling point. “However, overall, most Ulips are still costlier than mutual funds. Also, insurance is a need-based product. For example, you should buy term insurance only if you have dependents,” says Pankaj Mathpal, Founder, Optima Money Managers.