Beyond The Headlines: The Hidden Costs Of No GST On Life & Health Insurance

Starting 22 September 2025, the Indian government has exempted individual life and health insurance premiums from the 18% Goods and Services Tax (GST). This reform is a major relief for policyholders, potentially lowering premiums and making insurance more accessible. But the key question remains: will this exemption translate into real savings, or is there a hidden cost?

Before the reform, life and health insurance premiums attracted 18% GST, higher than the previous 15% under service tax. This made insurance costlier and discouraged wider adoption, particularly among middle-class families and senior citizens.

• Life Insurance: Term plans, ULIPs, endowment plans, and similar policies are GST-free.
• Health Insurance: Family floaters, critical illness plans, senior citizen health plans, and individual policies are exempt.
• Reinsurance: Reinsurance for individual life and health insurance also benefits from GST exemption.
• Exclusions: Group insurance and corporate policies remain taxable.

The GST exemption reduces out-of-pocket premiums. The table below illustrates potential savings:

Consumer Tip: Check if your insurer revises base premiums post-GST exemption — the visible 18% saving may not always be fully passed on.

Previously, insurers could claim ITC on GST paid for business inputs such as IT systems, marketing, professional services, and office rent, reducing net tax burden.

• Insurers cannot claim ITC on GST paid for inputs.
• The unrecoverable GST becomes a hidden cost in operational expenses.
• Insurers may increase base premiums to offset the cost, reducing the actual savings for policyholders.

• Insurer collects ₹100 as premium (before GST).
• Under 18% GST, customer pays ₹118. Insurer spends ₹12 GST on inputs → claims ITC → net GST payable = ₹6.
• Post-exemption: customer pays ₹100. Insurer still spends ₹12 GST on inputs, now unrecoverable → may increase base premium to cover this.

Realized savings may be around 10–12%, depending on insurer pricing.

• Insurance (life and health) is exempt from GST.
• Insurers lose ITC but adjust pricing accordingly.
• Affordability is ensured through government support schemes:

  – MediShield Life: Basic compulsory health insurance with premium subsidies.

  – MediSave: Mandatory medical savings accounts for premiums and hospital expenses.

  – Targeted subsidies for low-income households.

• Regulatory oversight by the Monetary Authority of Singapore (MAS) ensures fair pricing.

• Insurance premiums are GST-free, with affordability supported by government measures:

  – Private Health Insurance Rebate: Income-tested rebate applied to reduce premiums.

  – Medicare Levy & Medicare Levy Surcharge: Funds public healthcare.

  – Premium monitoring: Insurers must justify hikes to the Department of Health.

Example: An Australian family paying AUD 3,000 for health insurance:

• GST-free premium: AUD 3,000
• Government rebate (25%): AUD 750
• Effective premium: AUD 2,250

Also Read: Why CAs Are Celebrating? Whose Fight Was This? The Tax Audit Extension Saga

Challenges remain despite the exemption:

1. ITC Loss: Insurers may partially pass hidden costs to customers.
2. No subsidies announced: Unlike Singapore or Australia, India has no direct premium support for low-income households.
3. Price monitoring: Without oversight, insurers could adjust base premiums, reducing the net benefit to policyholders. 

Consumer Tip: Compare insurers’ plans, ask about any base premium adjustments, and stay informed on IRDAI notices.

1. Zero-Rating vs. Exemption: Adopting a true zero-rate model would allow insurers to charge no GST while still claiming ITC, ensuring full savings.
2. Government Support & Subsidies: Targeted rebates for vulnerable groups can maintain affordability.
3. Regulatory Oversight: IRDAI should monitor pricing and require insurers to justify premium hikes.

The zero GST on life and health insurance is a positive step. Families will see immediate relief on premiums, potentially boosting insurance adoption. However, headline savings may be partially offset by hidden ITC costs, making regulatory oversight, subsidies, and public awareness essential for the reform to achieve its intended impact.

(Disclaimer: The views expressed here are personal and not of Republic Media Network)