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From Sept 22, health, term insurance premium will come down by 18%

Group health plans to attract 18 pc; Health insurers to take up to 3 pc input tax burden

The move underlines the government’s clear intent: to directly ease costs for households and encourage individuals to buy protection covers, rather than extend the benefit to institutions. (File Photo)

From September 22, individuals buying term or health insurance policies will pay 18 per cent less on premiums, after the government’s decision to remove GST on these products. For instance, a health insurance policy with a premium of Rs 30,000 earlier attracted 18 per cent GST, taking the total payment to Rs 35,400. With the tax now scrapped, the same policy will cost only Rs 30,000 — a straight saving of Rs 5,400 for policyholders. The same benefit applies to term insurance, where premiums too will drop by 18 per cent.

However, this relief is restricted to individual covers. Group insurance plans — such as employer-sponsored health or life schemes — will continue to attract 18 per cent GST, with no input tax credit available to employers. The move underlines the government’s clear intent: to directly ease costs for households and encourage individuals to buy protection covers, rather than extend the benefit to institutions. “We will pass on the benefit to customers,” said an official of a leading government-owned insurer.

The removal of GST on all individual life insurance policies—whether term, ULIPs, or endowment—as well as on individual health insurance plans, including family floater and senior citizen covers, is a landmark step towards universal insurance inclusion, said Narendra Bharindwal, President of the Insurance Brokers Association of India (IBAI).

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All individual life insurance policies, including term, ULIP and endowment plans are exempt from GST. Similarly, all individual health insurance policies, such as family floaters and senior citizen coverage, are also included in the exemption, said Jignesh Ghelani, Partner at Dhruva Advisors. The government’s move is expected to deepen insurance penetration in the country, bringing underserved and unserved sections of the population under coverage.

Insurers collected a premium of Rs 1.18 lakh crore through health insurance policies in FY2025, a rise 8.98 per cent. Life insurers collected Rs 3.97 lakh crore during FY25, according to the Life Insurance Council.

The input tax credit issue is expected to bring a burden of 2.5-3 per cent on health insurers. “Insurers are unlikely to pass on this burden to customers in the current fiscal as the government is keen that the entire benefit is passed on to the customers,” said an insurance official.

Insurance companies have already raised concern, citing structural challenges such as the inverted duty structure that could potentially leave them with unutilised input tax credits. Insurers are then left with input tax credits they cannot utilise, as there is zero GST on health and life policies to offset the higher GST paid on various input services, industry executives said.

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In order to avail ITC, there has to be a GST component (even if it is at 5 per cent or lower). “A complete exemption (nil GST) would block ITC, while a reduced rate of 5 per cent would still allow a set-off. Hence, from an industry operations perspective, a reduction in GST rate (say to 5 per cent) may be more practical than a complete exemption,” he said.

As a nil GST is likely to impact the balance sheets of insurance companies, five per cent GST will be ideal from the industry point of view, said the top official of an insurance firm. A complete exemption may increase input costs as ITC will not be available. A calibrated reduction (say 5 per cent) would have struck a balance—ensuring affordability for customers while retaining ITC benefits for industry players, he said.

ITC is a mechanism under the GST system that allows businesses to claim credit for the tax paid on purchases (inputs) used to make taxable supplies (outputs). “To ensure that the full intent of this policy is realised for customers, clarity on the treatment of insurers’ input tax credits and transitional arrangements will be essential,” said Animesh Das, MD & CEO, ACKO General Insurance.

There’s a real chance that insurers may increase premiums to recover losses from their inability to claim input tax credit (ITC) next year, according to an insurance official. While exemptions can certainly reduce the cost component of premiums, how much of that reduction reaches the end consumer will vary across insurers.