Finance Ministry Directs Insurers to Pass GST Relief to Policyholders

The Finance Ministry has issued a strong directive to both life and general insurance companies, making it clear that the recent Goods and Services Tax (GST) exemption on individual health and life insurance premiums must be fully passed on to policyholders. This order applies to both existing customers and new buyers, ensuring that no portion of the tax relief is retained by insurers themselves. The decision, which comes into effect from September 22, 2025, has been framed as part of the government’s broader push to make insurance more affordable and expand coverage in the country.

The move follows the GST Council’s recent decision to scrap the 18% tax on such policies, a reform expected to boost insurance penetration across the country | Mint

What the GST Cut Means

Until now, premiums on individual life and health insurance policies attracted 18 percent GST, making them considerably costlier for families and individuals. By exempting these policies from GST, the government is attempting to reduce financial barriers and encourage more people to secure insurance. The exemption covers term plans, endowment policies, ULIPs, health policies, family floaters, and even senior citizen plans. Insurers have also been asked to actively inform customers of these changes through awareness campaigns so that the public can clearly understand the financial benefit.

The Debate on Classification

Despite the announcement, there is ongoing debate within the insurance industry regarding the technical classification of this change. Experts point out the crucial difference between policies being categorized as “nil-rated” and “exempt.” If policies are classified as nil-rated, insurers can continue to claim Input Tax Credit (ITC) on commissions, brokerage, and operational costs. However, if they are treated as exempt, insurers will lose this credit and be forced to absorb the cost themselves. Early indications suggest that the exemption falls under the “exempt” category, raising concerns about how much of the 18 percent benefit will actually reach policyholders.

The Impact on Premiums

While the government has promised complete relief, the ground reality may turn out to be more complex. Analysts suggest that policyholders may not see the entire 18 percent reduction in premiums. If insurers are unable to claim ITC, they may adjust their base premium to recover some of the lost credits. This could mean that customers enjoy a smaller reduction, possibly around 10 to 15 percent, rather than the full rate cut. The impact may be particularly significant for standalone health insurers, who rely heavily on individual health products and therefore stand to lose more from the withdrawal of ITC.

Government’s Broader Goal

At its core, this reform is driven by the government’s long-standing aim to strengthen financial inclusion. By reducing the cost of insurance, the Finance Ministry hopes to bring a larger section of India’s population under formal financial protection, especially at a time when healthcare costs are rising rapidly. State-run insurers are expected to introduce “zero-tax” policy plans in line with this decision, potentially driving higher volumes of insurance adoption even if margins remain under pressure in the short term.

The Road Ahead

The success of this reform will ultimately depend on clear communication and consistent implementation. Policyholders will need to pay close attention to renewal dates, since only policies renewed after September 22 will qualify for the exemption. Transparency from insurers will also be vital in showing customers how much of the tax relief is being passed on. Regulators such as the IRDAI are expected to monitor compliance closely and ensure that insurers do not use technical loopholes to dilute the benefit.

The MGMM Outlook

The Finance Ministry’s directive to insurers to fully pass on the GST exemption to policyholders marks a crucial step in making health and life insurance more affordable for ordinary citizens. Until now, the 18% GST on premiums significantly inflated costs, discouraging families from securing essential coverage. By removing this barrier, the government is not only easing the financial burden but also pushing forward its vision of wider financial inclusion. The exemption covers all major policy types—term, health, family floaters, ULIPs, and even senior citizen plans—ensuring that benefits reach every section of society. This reform reflects the state’s commitment to making healthcare security accessible at a time when rising medical expenses pose serious challenges for households.

At the same time, questions remain over how much of the relief will actually reach policyholders, since insurers may adjust base premiums to offset the loss of Input Tax Credit (ITC) if the exemption is treated as “exempt” instead of “nil-rated.” This could reduce the actual benefit to around 10–15% instead of the full 18%. Despite this uncertainty, the move sends a powerful signal about the government’s intent to prioritize citizens’ financial protection. The onus is now on insurers and regulators to ensure transparency and accountability so that this landmark decision fulfills its promise of expanding insurance coverage across the nation.

(Sources: Mint, News18, Economic Times)