Are you paying same insurance premiums even after GST cuts?:Here’s why your insurer isn’t ready to pass on the benefits yet

When Union Finance Minister Nirmala Sitharaman announced a major GST relief on insurance, policyholders expected immediate savings. Following the GST Council’s decision effective on 22 September 2025, individual health and term insurance policies were exempted from GST, bringing the tax rate down to zero. Group and corporate health policies, however, continue to attract 18% GST. On paper, the move looked like a big win for consumers. Insurers stopped charging GST on eligible individual policies, but many buyers soon noticed that premiums did not fall as sharply as expected. In some cases, prices barely changed. So what went wrong? The answer lies in how GST works behind the scenes—and particularly in the loss of Input Tax Credit (ITC). What changed under GST—and why it matters Under GST law, when a product or service becomes exempt or zero-rated, businesses cannot claim input tax credit on the GST they pay for related expenses. For insurers, this is a significant issue. Insurance companies incur GST on a wide range of operating costs—commissions, brokerage, marketing, office rent, IT services, and technology platforms. Earlier, when insurers charged 18% GST on premiums, they could offset these input taxes against the GST they collected from customers. With the exemption, that adjustment is no longer allowed. “As per GST law, no input credit is available on nil-rated or exempt goods or services,” explains CA Ashish Niraj, Partner, A S N Company, Chartered Accountants. “Once health and term insurance are exempt, all GST paid on expenses becomes part of the cost.” How loss of ITC raises costs for insurers CA Niraj illustrates this with a simple example. A term insurance company earning ₹50 lakh in premiums may incur expenses such as office rent, IT services, and marketing. Earlier, the insurer would collect ₹9 lakh as GST (18%) on premiums and adjust ₹3.88 lakh of GST paid on expenses. The net GST paid would be lower, and profitability would remain healthy. Once insurance becomes GST-exempt, the insurer no longer collects GST from customers—but also cannot adjust the ₹3.88 lakh input GST, which now becomes a direct cost. As a result, profits fall sharply unless pricing is recalibrated. “In simple terms, what looks like a tax saving for customers becomes a cost burden for insurers,” says Niraj. Why premiums didn’t fall much Because of this cost impact, insurers were left with limited options: · Absorb the higher costs and accept lower profitability · Increase base premiums to offset the loss of ITC · Rework commissions and pricing structures (subject to IRDAI approval) Many insurers—especially public sector insurers—implemented the GST exemption immediately. However, several private insurers recalibrated base premiums to reflect ITC loss. As a result, the full 18% GST benefit did not flow through to policyholders. Industry experts say this has made the exemption largely cost-neutral in the short term. “The exemption sounds consumer-friendly, but without ITC relief, it dilutes the visible benefit,” says an industry executive. “It’s not a price cut—it’s a tax restructuring.” Why insurers still support the GST cut Despite the challenges, insurers are not opposed to the GST exemption. In fact, they believe it could work over the long term—but only if higher affordability leads to wider adoption. “GST exemption can make insurance cheaper and encourage more people to buy policies,” explains CA Niraj. “If volumes rise significantly, higher revenue can offset the loss of input credit.” For example, if a company’s premium income grows from ₹50 lakh to ₹80 lakh due to improved affordability, overall profits may eventually surpass pre-exemption levels, even after absorbing GST costs. This is why insurers view the GST cut as a penetration play, not an immediate margin booster. Industry’s Demand: Fix the ITC Problem Recognising the structural issue, insurance councils, broker associations, and industry bodies have formally represented to the government. Their key demands include: · Partial restoration of ITC, especially on commissions and essential services · A concessional GST rate instead of full exemption · A specific carve-out allowing ITC on distribution, technology, and marketing costs Without such changes, the industry argues that GST exemption risks being sub-optimal for long-term affordability. “Without ITC relief, exemption alone cannot lower premiums meaningfully,” an industry note stated. Budget 2026–27: What the insurance sector wants Ahead of the Union Budget 2026–27, insurers and intermediaries are seeking broader reforms to strengthen insurance penetration. Key expectations include: · Higher tax deductions under Sections 80C and 80D · Extension of insurance tax benefits to the new tax regime · GST rationalisation for health and term insurance · Simplified regulations and faster product approvals · Incentives for preventive healthcare and wellness-linked covers Broker associations are also pushing for simplified compliance, digital-first licensing, and recognition of brokers as risk advisors. Conclusion The GST cut on health and term insurance was a positive intent-driven reform, but its impact has been blunted by the loss of input tax credit. For now, the benefit is more structural than visible. For premiums to truly fall, tax policy must balance consumer relief with insurer cost realities. Until then, GST exemption alone is unlikely to be the silver bullet many hoped for—but it may still be a step toward broader insurance adoption in the years ahead.