The central government is attempting to provide a huge benefit to the citizens by proposing a decrease to GST applied to their health and life insurance plans, from 18% to zero. If this proposal is approved, the policyholder will no longer need to pay additional tax on them premiums, making insurance more affordable. The final decision regarding this proposal is anticipated to occur at the GST Council meeting in October 2025, marking a huge change in the insurance industry.
The Centre has proposed to remove the Government Sales Tax (GST) completely from Health and Life premium policies. Currently, people are paying an 18% GST on the value of their policy. This was disclosed during a recent state finance ministers’ committee meeting by the convener of committee and Deputy Chief Minister of Bihar, Samrat Choudhary. All state governments consented to this proposal. The report is now headed to the GST Council in October for approval.
At present, if someone pays an annual insurance premium of ₹30,000, they pay another ₹5,400 as GST. Once the exemption is implemented, that cost will disappear and policies will not create such a burden on people’s finances. The premise is that this relief is to go to the consumer and not to companies. In addition, officials reported that if the insurers do not decrease their total costs, people would not feel the benefit. For this reason, the government is even contemplating to initiate the exemption next year as to pass the decrease along to customers.
This could, in fact, catalyze many more to purchase health and life insurance especially middle- class families who typically would try and avoid it due to these premiums being too high. People may even be less likely to reserves life insurance until later, and therefore, in the end, the exemption will likely expand insurance coverage eventually deeper into smaller towns and rural communities.
At present, both the Centre and states earn approximately ₹9,700 crores every year from GST charged on insurance premiums. Removing tax will mean no tax income. Of the total, around ₹3,500 crore goes to different state governments, and some states are nervous about how they are going to backfill the gap. In 2023 – 24, insurance companies have collected more than Rs. 8,262 crores from GST.
The Centre has indicated it is willing to take the blow, but the loss will not come back to insurers-it will be relief for customers. This is why the final signoff is being treated cautiously. Even with several thousand crores less for states that rely heavily on GST collections, it may be impactful to budgets. However, most still are supporting the move, seeing it as a long-term gain of social good in receiving affordable insurance products.
While the proposal to remove GST may appear to be a straightforward win for policyholders, there are a few caveats to consider. Officials have cautioned that the benefit will only be passed to consumers if insurance companies elect to pass on the tax relief by charging less than they did before. For example, on premium of ₹40,000 currently pays ₹7,200 as GST. The ₹7,400 goes straight to the government. After exemption, this cost should disappear.
If insurers merely retain their premium amount, I do not see the public making much of a fuss. This is why the Centre is being somewhat circumspect. It’s not just about announcing the cut. The Centre wants to ensure that insurers don’t hold on to the margin. If they do, the purpose of the measure will not be served. There is also the suggestion that roll-out may not begin until the next financial year. This amount of time would also allow for the establishment of rules. The Centre could also use this opportunity to reduce any confusion, and also confirm that the benefit actually trickles down to everyday policyholders.
The proposal has made it past round one, with a consensus from state finance ministers. The next step now rests in the GST Council meeting convened for October 2025. At this point the GST Council will make its final decision on the proposal to remove the compliance burden associated with insurance GST costs. The Council will likely weigh the potential revenue loss of ₹9,700 crores with the significant long term benefits this tax relief will bring to citizens, particularly when it comes to disposable incomes in complex and difficult times. If approved that would be a significant reform in the insurance sector, as it could develop and increase national levels of coverage within this nation between its citizens.
Currently for many middle-class family’s insurance has quite an upfront purchasing barrier level from which they could buy. I am referencing that quite simply, as values of policies may reach thousands and tens of thousands of dollars and then to also pay an upfront insurance premium, the likelihood is often disproportionate to their disposable income’s being spent that day.
States that are more dependent on GST revenues have weighed in and they have all brought forth concerns about reduced revenue, while seeing the long-term social impact of making insurance affordable for their citizens. The Centre, for its part has duly noted that the relief is designed for the consumers and not the insurance market participants. The decision in October or thereabouts will answer how quickly citizens will receive this shift in premiums.
So, at the end people may find insurance cheaper if GST is eliminated, and insurers may see an increase in demand. It may make policies less expensive for families, which could lead to more coverage. The final decision in October will determine whether this relief will be realized, but the intent is one of reducing the burden on policyholders.
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Nikita writes to inform, inspire, and ignite action through every blog and article.
