GST Relief on Health Insurance - but Premiums Might See a 3-5% Hike
The government has recently eliminated the Goods and Services Tax (GST) on individual life and health insurance premiums - an attempt to provide relief to consumers. But despite this significant tax cut, insurers are now facing a new challenge: the inability to claim Input Tax Credit (ITC) on their operational costs.
Under the previous GST regime, insurance companies could offset taxes paid on commissions, marketing, rent, IT services, and claims processing against the GST collected from policyholders. The zero-rated GST means these credits are no longer available, making operations costlier.
To protect their margins, insurers are evaluating a modest 3–5% increase in premium tariffs. This adjustment would help compensate for the lost ITC, ensuring financial viability without pushing up consumer costs too sharply.
Importantly, even after such adjustments, policyholders could still benefit from a net reduction of around 12–15% in premiums, assuming insurers pass on most of the tax relief. For example, a health policy previously priced at ₹17,700 with 18% GST could drop to between ₹15,450 and ₹15,750 after accounting for the necessary tariff adjustments—a meaningful saving for many.
However, industry leaders caution that increasing premiums might dampen demand, particularly among low- to middle-income groups the GST cut seeks to support. They argue that insulating consumers should remain a top priority, and raising tariffs should be a last resort.
Some insurers may choose to absorb part of the ITC loss through internal cost efficiencies—such as optimizing claims, renegotiating vendor contracts, or improving operations—rather than passing it on. Reinsurance, now also GST-exempt, offers partial relief.
In essence, while the GST exemption remains a positive move for enhancing access to insurance, its full benefits depend on insurers’ pricing strategies and the delicate balance between reduced taxes and elevated operational costs.
Under the previous GST regime, insurance companies could offset taxes paid on commissions, marketing, rent, IT services, and claims processing against the GST collected from policyholders. The zero-rated GST means these credits are no longer available, making operations costlier.
To protect their margins, insurers are evaluating a modest 3–5% increase in premium tariffs. This adjustment would help compensate for the lost ITC, ensuring financial viability without pushing up consumer costs too sharply.
Importantly, even after such adjustments, policyholders could still benefit from a net reduction of around 12–15% in premiums, assuming insurers pass on most of the tax relief. For example, a health policy previously priced at ₹17,700 with 18% GST could drop to between ₹15,450 and ₹15,750 after accounting for the necessary tariff adjustments—a meaningful saving for many.
However, industry leaders caution that increasing premiums might dampen demand, particularly among low- to middle-income groups the GST cut seeks to support. They argue that insulating consumers should remain a top priority, and raising tariffs should be a last resort.
Some insurers may choose to absorb part of the ITC loss through internal cost efficiencies—such as optimizing claims, renegotiating vendor contracts, or improving operations—rather than passing it on. Reinsurance, now also GST-exempt, offers partial relief.
In essence, while the GST exemption remains a positive move for enhancing access to insurance, its full benefits depend on insurers’ pricing strategies and the delicate balance between reduced taxes and elevated operational costs.