When the Goods and Services Tax (GST) was introduced back in July 2017, it was celebrated as India’s most ambitious tax reform since independence. The idea was to unify India’s fragmented indirect tax system into “one nation, one tax.”
But in practice? Multiple slabs, frequent disputes over classification, high compliance costs, and uneven burdens across industries made GST far more complicated than expected.
Fast forward eight years, and the government has rolled out GST 2.0—effective 22nd September 2025. This reform simplifies the earlier four major slabs (5%, 12%, 18%, 28% + cess) into just three:
- 0–5% → Essentials
- 18% → Standard rate for most goods and services
- 40% → Luxury and sin goods
The logic is clear: lower taxes on mass-use items boost demand, while higher rates on luxury and harmful products discourage overconsumption.
But the biggest headline from GST 2.0?
Health and Life Insurance premiums will no longer attract GST.
Insurance Goes GST-Free – A Big Relief?
Finance Minister Nirmala Sitharaman announced:
- All individual life insurance policies—whether term life, ULIP, or endowment—are exempt from GST.
- All individual health insurance policies—including family floater and senior citizen plans—are exempt from GST.
- Even reinsurance for these products is exempt.
That means, if you currently pay ₹20,000 annually for a health cover of ₹15 lakh, the GST component of ₹3,050 (earlier charged at 18%) will disappear.
On paper, it looks like a straight 15–18% saving for crores of policyholders. Insurance suddenly becomes more affordable and accessible, pushing India closer to its long-term goal of increasing insurance penetration.
The Catch: No Input Tax Credit (ITC) for Insurers
Here’s where things get tricky.
While policyholders are freed from GST, insurers lose their right to claim Input Tax Credit (ITC) on expenses like:
- Agent commissions
- Brokerages
- Office rent
- Software and IT services
For example: If an insurer pays ₹10,000 as commission, the GST on it (₹1,800) earlier used to be claimed as credit against the GST collected on premiums. From September 22, that ₹1,800 becomes a direct cost.
In the short term, your premium may look lighter. But over time, insurers are likely to load these extra costs back into renewal premiums.
What It Means for You
At first glance, premiums look cheaper. But in reality:
- Immediate savings: No GST means you don’t pay that 18% markup on your premium.
- Hidden cost: Insurers’ operating expenses rise because they lose ITC.
- Future impact: To protect margins, insurers may gradually increase premiums or restructure products.
So while GST-free insurance feels like a win, the net benefit could be smaller than you expect.
Final Takeaway
GST 2.0 simplifies India’s tax structure and rightly focuses on affordability for essentials. Making health and life insurance GST-free is a welcome move to encourage financial protection for the masses.
But for policyholders, the relief may be short-lived. As insurers absorb higher costs, premiums could creep back up over time.
In short: What looks like a saving of 18% today may translate into a much smaller net saving tomorrow.
Still, one thing is clear—GST 2.0 is a bold step forward, and its success will depend on how industries, including insurance, adapt to this new tax landscape.
