GST 2.0: Will Insurance Premiums Really Drop or Will Customers Miss Out on Full Tax Relief?

The implementation of GST 2.0 has raised both excitement and concern among policyholders and insurance companies alike. While the government has announced that the Goods and Services Tax (GST) on life and health insurance premiums will be completely removed, industry experts warn that customers may not experience the full benefit of this relief. The reason lies in the fact that insurance companies will no longer be able to claim Input Tax Credit (ITC) under the new tax regime.

What Changes Under GST 2.0?

Until now, insurance policies attracted an 18% GST charge, significantly inflating the overall premium amount for policyholders. With GST 2.0, this tax has been eliminated. On paper, this looks like a big win for customers, as they would expect their insurance premiums to fall sharply. However, the reality is more complex.

Insurance companies argue that without the ability to claim ITC, their operational costs will rise. For example, insurers pay GST on various expenses related to their business operations, such as services, logistics, and administrative costs. Previously, they could claim ITC and offset this tax burden. Under the new framework, this option will no longer be available, increasing their expenses and potentially pushing up base premiums.

Why Premiums May Still Go Up

Brokerage firm CLSA has suggested that insurance companies could raise base premiums by 1–4% to cover the losses from the absence of ITC. If that happens, policyholders may not see the full 18% reduction they were hoping for. Instead, the actual benefit could be smaller, leaving customers somewhat disappointed.

For instance, if a policyholder was paying a base premium of ₹20,000, the final amount with 18% GST came to ₹23,600. After GST removal, one might expect a flat reduction of ₹3,600. However, since insurers cannot claim ITC on operational GST payments (say ₹900 in this case), the new base premium may rise to ₹20,900. This means the customer saves only ₹2,700 instead of the full ₹3,600.

Industry Reactions and Uncertainty Ahead

Anuj Gupta, MD and CEO of HDFC Ergo General Insurance, explained that while everyone expects premiums to come down, the exact reduction will depend on how the ITC issue is resolved. Clarity is expected in the coming days, but insurers remain cautious.

Interestingly, insurers had opposed GST removal without ITC benefits in the first place. They feared that the move would hurt their margins and force them to reconsider their pricing strategy.

Former IRDAI member Nilesh Sathe echoed this concern in a LinkedIn post. He highlighted that insurers could face up to a 3% revenue hit on new policies due to the ITC restriction. While new policies may see price adjustments, old policyholders will not face higher premiums since insurers cannot suddenly change terms on existing contracts. Some insurers might absorb the loss internally, but others may adjust premiums for new buyers to offset the impact.

What It Means for Policyholders

Ultimately, the benefit to policyholders depends on how insurers handle this cost shift. If companies absorb the extra expense, customers will enjoy lower premiums. If not, the relief will be partial, though premiums will still drop compared to the earlier GST-inclusive rates.

Chartered Accountant Nitesh Buddhadev believes that while customers will definitely see premiums go down, the reduction will not be as steep as 18%. Policyholders can expect moderate relief, but not the massive cuts many initially imagined.

Final Word

GST 2.0 is clearly a mixed bag for the insurance sector. While the removal of GST on life and health insurance is a positive step toward making coverage more affordable, the denial of ITC creates fresh challenges for insurers. For customers, this means premiums will indeed become lighter, but not as drastically as hoped. Over the coming weeks, the industry will reveal whether it chooses to absorb the burden or shift it onto new policyholders.

One thing is certain—GST 2.0 will reshape the insurance market, and policyholders should closely monitor announcements from their insurers to understand the exact impact on their premiums.