The exemption directly reduces the cost of owning a policy, which can help more people buy cover and stick with it. However, how much of the full 18 per cent GST exemption would reach policyholders, depends on the insurers now.
Expert says this year the move will benefit policyholders, but they should be prepared for a rise in premiums ahead.
The GST Council’s decision to exempt individual life and health insurance premiums from tax has finally given policyholders some breathing room. Until now, you were paying an extra 18 per cent over and above your base premium. That meant a health cover of Rs 20,000 a year actually cost you Rs 23,600. From September 22, that same cover will cost only Rs 20,000.
On the face of it, this looks like a straightforward win. Lower premiums make insurance more affordable at a time when medical inflation is already in double digits. But dig a little deeper, and the picture is not as simple.
Insurers earlier enjoyed input tax credit (ITC) on their expenses, commissions to agents, administrative overheads, reinsurance, outsourcing, and even basic utilities. With GST removed, this cushion is gone.
Experts explain that if Rs 150 went towards such expenses, companies could claim about Rs 27 back through ITC. With zero GST on individual health and life insurance premiums, that benefit disappears.
This leaves insurers with a choice. They can either absorb the hit by accepting slimmer margins or adjust the base premium upwards. For example, instead of Rs 1,000, the base could move to Rs 1,027. In that case, you still save, but the benefit falls to around 15 per cent rather than the full 18 per cent.
Says Shilpa Arora, Co-founder of Insurance Samadhan, “This year the move will benefit policyholders, but they should be prepared for a rise in premiums ahead. The bigger challenge lies not in GST, but in escalating claims and inflated hospital bills, which continue to drive costs upward.”
How insurers respond will depend on the market. When it comes to health insurance, the costs of medical bills are far outpacing basic health coverage. Additionally, there has been a growing issue between hospital billings and insurer approvals for some key treatments, which is putting policyholders at risk.
Larger companies may prefer to hold prices steady for their health and terms plans, while smaller ones could be forced to pass some of the cost on. Says Arora, “Insurers are likely to recalibrate premiums gradually. Some may pass on costs to maintain margins, especially with rising claims, while others might absorb part of it to stay competitive. Ultimately, strategies will vary, balancing profitability with affordability to retain customers.”
The bigger point here is transparency. Unless insurers clearly show how the exemption is reflected in your premium, it will be hard for customers to know if the benefit is being passed on fully.
This is also where the regulator, Insurance Regulatory Development Authority of India (Irdai), might need to keep watch. The intent of the reform is to make insurance more affordable, not to create an accounting reshuffle that leaves policyholders with less than promised.
For now, though, the direction is positive. The exemption directly reduces the cost of owning a policy, which can help more people buy cover and stick with it. Whether you are paying for health protection or a life policy, the cheque you write after September 22 will be smaller than before. Exactly how much smaller depends on what your insurer decides to do with its pricing.
