GST Rate Cut - In September 2025, the Goods and Services Tax (GST) Council announced a major reform that directly impacts health and term insurance premiums. During the 56th GST Council meeting, it was decided that all individual life and health insurance policies would be fully exempt from GST. Earlier, an 18 percent tax was charged on these policies. The change will take effect from September 22, 2025.
This exemption covers not only basic term and health insurance plans but also unit-linked insurance plans (ULIPs), endowment plans, family floater policies, and senior citizen health insurance policies. The move is part of the larger restructuring of the GST system, which now has only two tax slabs—5 percent and 18 percent. Insurance was earlier placed in the higher bracket of 18 percent, making premiums significantly costlier.
The timing of this reform is also notable. It comes just before the festive season, when household spending generally increases. The government has packaged this decision as part of a wider attempt to simplify the tax system, boost domestic demand, and make essential financial and health services more affordable.
The immediate effect of this GST exemption is that insurance premiums will be cheaper. Earlier, a policy priced at ₹10,000 attracted an additional 18 percent GST, which increased the final cost to around ₹11,800. With GST removed, the same policy will now cost only the base premium of ₹10,000.
Another way to look at it is to consider a policy priced at ₹8,475. Earlier, the final price after adding GST would have been ₹10,000. Now, the same plan will remain at ₹8,475. This means an instant saving of around ₹1,525 simply because the tax has been removed.
For families paying annual premiums for multiple health and life insurance policies, this change adds up to a substantial saving. It will especially benefit middle-class households and senior citizens, who often see insurance as a necessary but expensive commitment.
Insurance penetration in India has always been low compared to developed economies. High premiums and lack of awareness have been key reasons behind this gap. The GST exemption is expected to make insurance products more affordable, thus encouraging more people to purchase them.
Experts believe that lower premiums will particularly benefit low- and middle-income households. For many, insurance will now be seen as a more practical and affordable option, rather than a financial burden. Over time, this could significantly improve India’s insurance penetration rate, bringing more families under financial protection.
Increased penetration also supports broader economic security. When more individuals and families are insured, there is less dependency on government welfare during medical emergencies or untimely deaths. This helps build resilience at both household and national levels.
While customers stand to gain from lower premiums, insurance companies face a slightly different situation. Earlier, insurers collected GST on premiums and could also claim input tax credit on certain expenses. With GST removed, these credits are no longer available.
This means insurers might see short-term pressure on their margins. They will need to adjust their accounting practices and pricing models to reflect the loss of tax credits. Some companies may absorb these changes internally, while others might look for operational efficiencies to maintain profitability.
Analysts have pointed out that the reform could push insurers to rethink their product strategies. While the tax relief makes policies more attractive to buyers, the industry must ensure that business models remain sustainable in the absence of GST-linked benefits.
The decision to exempt insurance premiums from GST is also a step toward simplifying the tax system. India has now moved to a two-slab GST structure, which makes compliance easier for businesses and reduces administrative complexity for regulators.
For insurers, this means fewer complications in premium calculations, billing, and reporting. For policyholders, it increases transparency. There is no longer a need to calculate or question the added tax burden on premiums, which simplifies the purchase decision.
This simplification also signals stability in the tax system. A more predictable regime helps build confidence among both consumers and companies, making the insurance sector more attractive in the long run.
The GST exemption on insurance is part of a bigger economic reform often referred to as “GST 2.0.” The government expects that making essential goods and services cheaper will increase consumption across sectors.
According to fiscal authorities, the cost of this reform to the exchequer will be about ₹48,000 crore. However, this is seen as a manageable figure considering the potential benefits of higher consumer spending and stronger insurance penetration.
Economists estimate that this change could add between 20 to 30 basis points to India’s GDP growth in the financial year 2026. When more households spend on insurance and healthcare, it not only protects them financially but also strengthens overall demand in the economy.
The announcement has already influenced investor sentiment. Insurance stocks such as HDFC Life and the Life Insurance Corporation of India have seen positive traction in the market. Investors expect that the removal of GST will drive more customers toward insurance products, expanding the market size.
While insurers may experience margin pressure in the short term, the long-term outlook appears positive. Higher demand and greater insurance penetration will ultimately support industry growth. Market experts believe that insurers with strong distribution networks and innovative product offerings will benefit the most from this reform.
The GST relief was not limited to insurance policies alone. The Council also announced tax cuts on several essential medicines and medical devices. This will make healthcare more affordable, especially for patients who require long-term treatment or life-saving drugs.
Taken together, cheaper health insurance and lower medical costs reduce the financial stress of healthcare for families. It also supports the government’s goal of achieving wider healthcare coverage and improving access to essential medical services.
The exemption of GST on health and term insurance premiums marks a significant change in India’s tax and insurance landscape. From September 22, 2025, all individual insurance policies will no longer attract the 18 percent GST, leading to direct cost savings for policyholders.
This reform makes insurance more affordable and encourages higher adoption, especially among households that previously found premiums unaffordable. It also simplifies the tax system, making it easier for both insurers and customers to manage their policies.
Although insurers may face short-term margin challenges due to the loss of input tax credits, the long-term benefits are clear. A larger customer base, stronger industry growth, and improved economic security are expected outcomes.
At a broader level, this decision aligns with the government’s efforts to simplify taxation, boost consumption, and strengthen financial protection for citizens. With healthcare costs rising and economic uncertainties always present, this policy change could not have come at a better time.