The GST Council, on Wednesday (September 3 2025), removed the 18 per cent Goods and Services Tax on individual health and life insurance premiums. From September 22, 2025, policyholders will no longer see an additional GST component inflating their insurance bills.
This announcement sounds like a straight win for policyholders since premium invoices should immediately drop, right? But the long-term outcome of this relief may not be as straightforward.
While the move is undeniably a step towards making insurance more affordable and accessible, the actual benefit to customers may be smaller than it appears on paper, and likely temporary.
The ITC trade-off
As CA Manas Chugh of Osgan Consultants Tax points out, insurers today pay GST on services like IT systems, call centres, advertising, commissions, and rentals. They typically recover this through input tax credit (ITC). With premiums now moved to a zero-rated bracket, insurers cannot claim ITC anymore. This means all the GST insurers ' expenses become a direct cost to them.
“On the face of it, customers should see an 18 per cent fall in invoices. But in reality, since insurers are absorbing unrecoverable GST on their input costs, the net benefit that can be passed on may only be in the range of 5 to 6 per cent” Chugh explains.
He also argues that a lower GST rate with ITC, rather than zero GST, might have been a more efficient route. A reduced rate would have kept the credit chain intact, while still giving relief to customers.
Premiums will be recalibrated gradually
The more immediate question is what insurers will do with this altered cost structure. According to Shilpa Arora, Co-founder of Insurance Samadhan, the relief this year is real but could be short-lived.
“Yes, the move benefits policyholders today. But with rising claims and inflated hospital bills, premiums are bound to rise in the future. Insurers are likely to recalibrate gradually; some may pass on the additional costs to maintain margins, while others could absorb part of it to stay competitive,” she notes.
Arora also cautions that while the invoice looks simpler without GST, hidden costs could creep in. “If insurers load premiums to offset the loss of ITC, customers may still feel confused. Transparency will be key.”
The industry view
From the industry’s perspective, the reform fits well with the long-term goal of “Insurance for All by 2047.” Samir Shah, executive director and CFO of HDFC ERGO General Insurance, called it “a welcome development” that directly addresses affordability and access. But he also says that the extent of premium reduction will depend on how the ITC loss plays out for the insurers.
Echoing this optimism, Gaurav Dubey, Founder and CEO of Livlong 365, says this exemption is a “landmark reform” that could break price barriers, especially for first-time buyers in Tier-2 and Tier-3 cities. He believes that, coupled with awareness campaigns, this move could boost penetration rates, which remain at just 4 per cent in India compared to a global average of 7 per cent.
Chetan Vasudeva, senior Vice President, business development at Elephant.in, Alliance Insurance Brokers says, “The removal of GST would spur insurance penetration in India, where protection levels have been historically low in comparison to international norms. Health insurance would witness a significant boost as consumers, particularly young families, would be able to access policies more easily without the burden of additional tax.”
What this means for policyholders
For now, customers can expect some relief in their invoices, likely in the single digits rather than the headline 18 per cent. Over the next few years, as insurers adjust to the loss of ITC and rising claim costs, premiums will inevitably be recalibrated. The bigger picture, however, is that the government is signalling that insurance should be more of a necessity than a discretionary spend.
The relief in that sense is less about immediate savings and more about a nudge towards wider adoption of insurance in India.
