The Goods and Services Tax (GST) reforms unveiled in September 2025 go beyond simplifying tax slabs and restructuring economic policies—they mark a pivotal moment for Indian citizens by making life and health insurance significantly more affordable. As a natural follow-up to the simplification of GST rates on goods and services, the new exemption of GST on all individual life and health insurance policies represents a people-centric move aiming to boost insurance coverage, financial security, and health resilience for millions across the country.
This article explores the rationale, significance, and impact of the GST exemption on insurance premiums, along with its ties to both the rationalized GST rate structure and the broader economic benefits these reforms aim to create.
Context: The High Cost of Insurance Under Previous GST Regime
Prior to the 2025 reforms, life and health insurance policies in India were subject to an 18% GST on the premium amount. For many households, especially middle and lower-income groups, this made insurance prohibitively expensive, discouraging uptake and limiting coverage.
Insurance companies also faced operational challenges: while collecting GST from policyholders, they paid taxes on various overheads—agent commissions, administration, marketing, and technology systems—yet could offset these through Input Tax Credit (ITC) mechanisms. Despite this, the 18% tax added a considerable cost layer on insurance premiums, suppressing demand and reinforcing the country’s low insurance penetration rate, which lingered around 4% of GDP, well below global averages.
Recognizing this critical barrier, the GST Council’s 2025 reforms took a historic step to exempt individual life and health insurance policies from GST, effective September 22, 2025—a move with wide-ranging benefits for people and the economy.
What the GST Exemption Covers
The exemption applies comprehensively to:
- All individual life insurance policies, including term life insurance, Unit Linked Insurance Plans (ULIPs), and endowment policies.
- Individual health insurance policies, covering family floater plans, senior citizen plans, and reinsurance thereof.
- Any premium payments made on or after the effective date are exempt from GST.
This overhaul eliminates the 18% tax on insurance premiums, effectively reducing the cost of insurance substantially for consumers.
Impact on Citizens and Insurance Penetration
The exemption delivers immediate financial relief for policyholders. For example, a family with an annual health insurance premium of ₹50,000, previously paying an additional ₹9,000 as GST, would now save this full amount, making insurance over 15% cheaper instantly.
Industry leaders and experts foresee this tax relief enabling:
- Wider Insurance Adoption: Lower premiums make insurance products accessible to a broader cross-section of society, including informal sector workers, low-income families, and rural populations.
- Enhanced Financial Security: With health and life risks looming large, affordable insurance can protect families from sudden medical expenses or income loss, reducing vulnerability to financial shocks.
- Support for Senior Citizens: Senior citizen health plans, which often command higher premiums, become more affordable, ensuring better health coverage for India’s aging population.
- Increased Coverage Amounts: Price reductions encourage policyholders to opt for higher insured sums, amplifying protection levels.
- Progress Towards ‘Insurance for All’: The move aligns with India’s national vision to improve insurance penetration to global standards (roughly 6.8% of GDP) by 2047.
Industry experts also acknowledge that this exemption reinforces India’s global stance as a progressive nation in insurance taxation, comparable to countries where health insurance is either zero-rated or exempt from indirect taxes.
Implications for the Insurance Industry
While the exemption benefits consumers, insurers face a complex transition. With no GST charged on premiums, insurance companies lose a mechanism to claim Input Tax Credits on overheads, potentially increasing operational costs. This may temper the extent to which insurers can reduce premiums immediately.
Nevertheless, industry leaders express optimism, expecting most of the tax benefit to be passed on to consumers as companies streamline operations. The simplified GST structure overall is anticipated to boost market size, benefiting insurers through increased volumes even if margins adjust.
Linkage with Simplified GST Rate Structure
This exemption complements the broader GST reforms that rationalized tax slabs from four to two major rates—5% and 18%—plus a special 40% for sin goods. While the simplified slabs reduce tax burdens on everyday essentials and critical sectors, the insurance exemption specifically targets the citizen’s well-being by removing indirect taxation on essential financial products.
Broader Economic and Social Impacts
By making insurance more affordable, these GST reforms help build a more resilient economy. Increased insurance uptake reduces the financial risks that households face during health emergencies or life contingencies, lowering dependence on social safety nets and out-of-pocket expenditures.
For the healthcare sector, enhanced insurance coverage translates into higher demand for quality medical services, stimulating investment and efficiency improvements.
Bridging to the Next Topic: Economic and Business Impact
While the direct benefits to citizens and families through insurance exemptions are profound, GST reforms also have far-reaching impacts on the broader economy and business environment.
The next article will explore these macroeconomic and business implications in detail, highlighting how GST reforms enhance ease of doing business, boost demand across sectors, and position India for sustained growth in a globalized economy.
