When Finance Minister Nirmala Sitharaman announced in the 56th GST Council meeting that GST on individual health and life insurance premiums would be reduced from 18 per cent to 0 per cent from September 22, 2025, policyholders were understandably relieved. But experts say the benefit you finally see may depend on whether these premiums are classified as nil-rated or exempt, two terms that sound similar but have very different cost implications.
“Nil-rated supplies are taxable supplies with 0 per cent GST, which means insurers can still claim input tax credit (ITC). Exempt supplies, on the other hand, are outside GST and do not allow ITC,” an tax expert explained.
“This difference decides whether insurers can offset GST paid on expenses like rent, agent commissions, and IT services and that directly impacts your premium,” he said.
Why nil-rating matters for your wallet
Under the previous regime, insurers collected 18 per cent GST on premiums and claimed ITC on expenses, reducing their net tax cost.
Surana offers a simple example:
- Earlier: For a Rs 100 premium, insurers paid Rs 5.4 GST on costs and claimed this as ITC, keeping net cost neutral.
- Now (if exempt): They must reverse that ITC, effectively increasing operating costs by 5.4 per cent. To maintain margins, premiums may have to be raised by roughly the same percentage.
Another tax expert agrees. “Exemption amplifies the cost burden on insurers. The Rs 9 GST they paid on Rs 50 of expenses now becomes an additional cost without ITC. To recover this, the premium could rise from Rs 100 to Rs 109.”
Standalone health insurers may face bigger pain
Experts warn that standalone health insurers (SAHIs) could be hit harder than general insurers because they lack other taxable product lines like motor or fire insurance to offset ITC.
“Nearly 30 per cent of insurers’ costs attract GST,” says Surana. “We expect retail health premiums could rise by 5-6 per cent.”
Another tax expert puts the potential impact higher: “SAHIs might see premium hikes of 12-18 per cent if the exemption continues.”
Industry waiting for clarity
Insurers and industry bodies are urging the GST Council to treat these premiums as nil-rated rather than exempt to preserve ITC flow. “Clarity is expected in the coming weeks,” he says. “This will decide whether the full benefit of the GST cut can be passed on to policyholders or not.”
Until then, the zero-GST announcement is good news, but the size of your actual saving depends on what the GST Council clarifies next.
