Fortune India Explainer: Will GST removal make insurance cheaper? What it means for life, health, motor, and group plans

The Government's move to exempt individual health and life insurance policies from 18% GST has raised several questions for policy buyers, existing policyholders and insurers. While straightforward policy buyers may see a reduction in costs, insurers may face challenges due to higher expenses resulting from the loss of input tax credit. The following FAQ explains how changes may impact premiums, buyers' preferences and insurance stocks.

Q1. What are the recent changes to GST on insurance policies, and when will they be implemented?

A. The government has exempted individual life and health insurance policies, including reinsurance, from the 18% GST applicable. The exemption will take effect from September 22, 2025.

Q2. Why could insurers still increase premiums after GST was removed?

A. Insurers used to claim input tax credit (ITC) on the expenses incurred on commissions, operations, promotions and reinsurance. With the exemption, ITC will be gone. To offset this loss, insurers may raise premiums by 3-5%, according to some reports.

Q3. How much can a policyholder save after the GST exemption?

A. According to several reports, the exemption could make policy 12-15% cheaper overall. However, some reports suggest that the premium will decrease by 10% instead of the 18% GST reduction.

Q4. Will all insurers reduce premiums equally?

A. No. According to the Kotak Institutional Equity report, Star Health may increase the tariff by 1-3% after the GST exemption and removal of the ITC benefit. On the other hand, Niva Bupa could see around 4% increase due to higher expenses and ceding ratio. This way, policyholders may not see the full impact of the GST reduction on their insurance policies.

One must also understand that multi-line insurers may face a lower impact, as GST on shared services can be absorbed by other business lines, unlike single-line insurers, which mainly focus on health.

Q5. What risk do insurers and policyholders face under the new GST regime?

 A. According to reports, the premium hike as well as reduction may be delayed. Policy buyers may use the one-month free-look period to switch to a cheaper new policy. As mentioned above, single-line insurers may face higher cost pressure compared to multi-product insurance firms.

Q6. Will there be GST refunds for auto premium payments made in September?

A. Experts say if you have already paid the premium or it is getting deducted via auto payment, including GST, you will not receive any refund. Taxes are paid at the time of the transaction. This way, those who paid a premium on three-year-long term policies will not get any refund.

Q7. Will the GST rate cut on insurance lead to a re-rating of sector stocks?

A. According to analysts, they believe the GST exemption could be structurally positive for insurers.  Lower costs may boost demand, improve the persistency ratio, and support long-term growth. Some experts view this as a catalyst for higher valuations, given India's low market penetration compared to the global market. However, some experts remain cautious, saying that the GST cut alone may not be enough to lift earnings and sales.

Q8. How are group/employer-sponsored insurance policies treated under GST now?

A. Group or employer-sponsored insurance remains taxed at the full 18%, even after the exemption for individual policies, according to reports. This shows that distinction is maintained between individual insurance policies and employee-sponsored plans.

Q9. Will vehicle insurance premiums also be eligible for GST exemption?

A. Car and other vehicle insurance policies will not drop to zero per cent GST under the new GST rule. The exemption only applies to individual life and health insurance (including family floater) plans. Motor insurance and other general insurance products will continue to be taxed.

Q10. Could the GST exemption create regulatory or compliance challenges for insurers?

A. Experts believe that with insurance policies classified as exempt, the insurer must carefully separate taxable and non-taxable services in their accounts. They warn that this may increase administrative overheads, invite scrutiny from tax authorities, and complicate audits in the initial years. The regulator, Insurance Regulatory and Development Authority of India (IRDAI), may also need to issue fresh guidelines to ensure transparency in pricing and protect policyholders from arbitrary premium hikes.