Summary of this article
GST cut from 18 per cent to five per cent lowers premiums by 13 per cent.
Nil GST removes ITC, reducing benefits to only nine to 11 per cent.
Rising medical inflation and taxed healthcare services increase insurer cost burden.
Real savings need GST rationalisation across insurance, medicines, and hospitalisation.
World Senior Citizen Day
A GST cut on insurance premiums may not fully benefit policyholders. In fact, cutting GST rates can be better for customers than making GST rates nil.
When the GST rate on health insurance premiums is reduced from 18 per cent to five per cent, policyholders will see a direct reduction in the overall cost of their premiums—typically around 13 per cent. While this drop is significant, it doesn't equate to a full 18 per cent decrease because the premium itself is composed of various cost elements, not just tax.
When Zero Isn't Zero: The Insurance Premium Paradox
However, if the GST is made nil, the situation will get more complex. One might expect a complete 18 per cent reduction, but in reality, the savings are noticeably less. This is primarily because insurance companies lose their eligibility to claim input tax credit (ITC) on the GST they pay on their own expenses—such as IT services, agent commissions, outsourced claims processing, and other vendor-provided services.
"Previously, insurers could offset the GST collected from policyholders with GST paid on these inputs, reducing their effective tax outflow. With zero GST, insurers can no longer claim ITC, which means the operational costs previously mitigated by credits will now be embedded in the base premium itself," says Ankit Jain, Partner, Ved Jain and Associates.
In other words, GST insurance premium dropping from 18 per cent to five per cent would mean that ITC would still be available to the insurance company, and they can pass on the entire 13 per cent benefit to the consumers. Hence, ideally, the seniors and all the citizens who take term or mediclaim insurance would save around 13 per cent on their premiums.
This is, of course, subject to the fact that the insurance companies immediately pass on the benefit of the GST Rate reduction to consumers.
"It is thus also important to note here that the anti-profiteering Section 171 of the CGST Act, which used to mandate this pass on of benefit has already been sunset and the GST Council should re-inforce the same in a way to ensure that the full benefits of GST is received by senior and other citizens," says Vivek Jalan, partner, Tax Connect Advisory Services.
On the contrary, if the GST rate on insurance is reduced to NIL, then the insurance companies would lose on the ITC. "As per estimates, ITC is around 40 per cent to 50 per cent of the output tax liability for an insurance company; considering the same, the consumers will only be passed on the benefit to the extent of nine per cent to 11 per cent of the premium amounts," says Jalan.
Absorbing the loss of input tax credit is financially challenging for insurers, especially against the backdrop of rising medical inflation and claims costs. If insurers have to shoulder these unrecoverable tax costs, their cost structures increase.
"As a result, the anticipated reduction in insurance premiums for consumers may not materialise in full, and any cost benefits from the GST exemption could be substantially diminished or even wiped out, depending on how much input tax credit the insurer was claiming previously," says Jain.
Why GST Cuts Alone May Not Lower Premiums
A critical but often overlooked factor in the insurance pricing equation is that much of the healthcare supply chain in India is subject to GST. Medicines, diagnostic services, hospital consumables, and a range of treatments currently attract different rates of GST. All the GST paid on these supplies and services directly increases claims costs for insurance companies.
These claim-related costs are reflected in the premiums charged to policyholders, including senior citizens, so even if the GST on insurance premiums is reduced or removed, the benefit is partly offset if the underlying healthcare costs remain taxed.
"Therefore, for seniors to experience genuinely lower and sustainable insurance premiums, policymakers must consider rationalising GST across the entire healthcare ecosystem—not just on insurance premiums but also on medicines, diagnostics, hospitalisation, and other related services," says Jain.
Only a comprehensive approach can ensure that insurance premiums accurately reflect the true cost of care, without being inflated by cascading taxes throughout the value chain. Reducing GST on both insurance and healthcare services is essential to make health coverage genuinely affordable for seniors and advance the goal of healthcare access for all.
