The Goods and Services Tax (GST) Council has recently announced a significant policy shift by eliminating the 18% GST levy on individual life and health insurance premiums. This move, however, comes with a simultaneous withdrawal of the Input Tax Credit (ITC) benefit for insurance companies, a development that has created uncertainty in the sector.
Insurance industry experts are cautioning existing policyholders whose health and life insurance plans are due for renewal before September 22 to proceed with renewals promptly. Delaying the process could result in the loss of valuable benefits such as no-claim bonuses and renewal discounts, which are typically offered to policyholders who maintain continuous coverage.
On the other hand, new customers may find it advantageous to postpone purchasing a fresh life or health insurance policy until after September 22, when the GST rate cut will be fully implemented.
Uncertainty Surrounds GST Cut Impact
Industry leaders point out significant ambiguity regarding the implications of the GST cut for both new customers and existing policyholders who have recently paid their premiums. According to Hanut Mehta, CEO and co-founder of BimaPay Pinsaure, “There is a grace period in insurance policies, usually lasting about a month after the expiry date. Due to lack of clear communication from insurers on the premium reduction, customers can consider waiting until the September 22 deadline.”
However, if the grace period lapses before September 22, policyholders may lose benefits such as no-claim bonuses and renewal discounts, which could outweigh the benefits of the GST cut. Experts strongly advise that discontinuing a policy in anticipation of GST benefits could result in a break in continuity and loss of coverage.
Dhirendra Mahayanashi, co-founder and CEO of Turtlemint, emphasizes, “It is critical for existing policyholders to avoid delaying renewals due to GST changes, as this may cause policy breaks and additional complications.”
One-Month Free Look Period Opportunity
A report by Kotak Institutional Equities highlights that some customers may take advantage of the one-month free look-back period to surrender their existing policies purchased last month and switch to newer, more affordable ones after the GST rate cut is effective. The free-look period allows policyholders to cancel their insurance without penalty within 30 days from the policy issuance date.
Withdrawal of Input Tax Credit (ITC)
While individual life and health insurance premiums are now GST-exempt, the simultaneous removal of the ITC provision is creating cost pressures for insurers. Previously, ITC allowed businesses to offset their tax liability by claiming credits for GST paid on purchases.
According to the Insurance Regulatory and Development Authority of India (IRDAI), insurers will likely absorb part of the cost burden while passing some of the benefits to customers. Policies already sold factored in the input tax credit, and its removal means insurers will not receive the benefit retrospectively. This has led to a marginal increase in cost for insurers, potentially driving them to adjust their premiums upwards by 3–5% to compensate for the ITC loss.
However, the industry report adds that such price increases may not occur immediately but could take effect with some delay.
Potential Boost in Insurance Demand
Despite these adjustments, the reduction in GST rates is expected to boost health and life insurance demand by 12–15%, as the final consumer price becomes more attractive. Insurers will need to balance their pricing strategies carefully, given the dual challenge of a zero GST rate and the withdrawal of ITC.
Read More: GST Confusion Continues: Zomato, Swiggy Face 18% Tax, E-Commerce Operators Still Unclear
