The Goods and Services Tax (GST) Council, after its 56th meeting on 4 September 2025, announced a GST exemption on all health and life insurance premiums as part of the central government’s indirect tax rationalisation move. The industry has welcomed this step even though the risk of a higher premium looms due to the losses imposed by the input tax credit (ITC) on companies.
This development brought much-awaited tax relief in the insurance sector, cutting the GST on premiums from 18% to 0% (nil), effective as per the new GST norms that will take effect on 22 September 2025.
Mint reported earlier that the central government aims to directly aid consumers by reducing insurance product costs through this move. However, this transmission of the effects of tax cuts lies with the insurers to extend to their customers.
Hike in insurance premiums
Brokerage firm Kotak Institutional Equities expects that the health insurance companies may increase their tariffs by 3-5% to help compensate for the losses prompted by the ITC.
“A back-of-the-envelope calculation suggests a 3-5% hike in tariffs (for new and existing retail policies) may be required by health insurance companies in order to make them margin-neutral,” said the brokerage in its recent report.
Industry experts estimate that, as the GST tax cuts are imposed on insurance premiums, if the ITC factor on expenses is not allowed, the insurers are likely to lose a significant cost offset.
The input tax credit is a form of credit that a company can claim. It allows firms to only pay tax on the value added, not the whole product sold to the end customer. This move prevents double taxation and ensures transparency in the system.
Insurance companies are facing higher costs and GST for inputs like IT services, rentals, and professional fees, even though the overall expenses are capped at 30% levels by the insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI).
Higher premiums — a risk for industry
Chief Financial Officer and Chief Compliance Officer of Insurance Brokers said that insurance companies raising their tariffs should be the ‘last resort’ as this move will ‘dilute’ the government’s intent of the GST exemption.
If the companies decide to raise their tariffs to offset the ITC losses, they risk a sharp rise in base premiums, which is likely to discourage the adoption of insurance in the market.
“Raising tariffs should be a last resort. While it helps protect margins, it risks diluting the very intent of the GST exemption, which is to make insurance more affordable. A sharp increase in base premiums could discourage adoption, particularly among price-sensitive segments,” he told Mint.
She explained how many companies in the sector can face the losses of ITC, outweighing the tax exemption benefits. Hence, there is a benefit on one side while pressure on another, prompting the discussion of ‘repricing’ tariffs to improve the margins.
Industry expert, MD and CEO of Rurash Financials, also echoed this view, emphasising that if companies are denied the opportunity to offset their ITC, this move will ‘hamper’ the entire objective of the GST cuts.
“Insurance companies will pass on the input tax credit. So technically, no difference to the end user,” he told Mint.
What should companies do to offset ITC losses?
To offset the losses incurred by the ITC, companies can focus on boosting their operational efficiency, renegotiating their service contracts, and optimising claims management. These measures can likely help the companies amid the government’s tax cuts.
“Reinsurance, which is now GST-exempt, also provides partial relief. These measures can help absorb costs without immediately passing the burden to policyholders,” he said, emphasising the risks of potentially discouraging customers from the insurance sector with the sharp rise in base premiums despite the GST rate cuts.
