Why Insurance Premiums Haven’t Fallen After GST Cut: Input Tax Credit Loss Blunts Consumer Gains

The answer lies in the mechanics of GST—specifically, the loss of input tax credit (ITC) for insurers once a service becomes exempt.

Under GST law, businesses cannot claim ITC on exempt or nil-rated supplies. For insurers, this has significant cost implications. Insurance companies pay GST on commissions, brokerage, marketing, office rentals, IT systems, and technology platforms. When premiums attracted 18% GST earlier, insurers could offset these taxes against the GST collected from customers. With exemption in place, that adjustment is no longer permitted.

“As per GST law, no input credit is available on exempt services,” said CA Ashish Niraj, Partner at A S N & Company. “Once health and term insurance are GST-free, all GST paid on operating expenses becomes a direct cost.”

Industry estimates suggest this shift has materially raised insurers’ cost bases. To maintain financial viability, insurers faced three options: absorb the higher costs, raise base premiums, or recalibrate commissions and pricing—often requiring regulatory approval. Many private insurers chose recalibration, limiting the pass-through of tax savings to consumers.

This explains why the GST exemption has been largely cost-neutral in the short term. “It’s not a price cut; it’s a tax restructuring,” said a senior industry executive, noting that without ITC, exemption dilutes the visible benefit.

Despite this, insurers broadly support the GST move, viewing it as a long-term affordability and penetration strategy. If lower headline taxes expand insurance adoption, higher volumes could eventually offset the ITC loss. However, industry bodies argue that structural fixes are needed to unlock real savings.

Ahead of the Union Budget 2026–27, insurers and intermediaries have sought partial ITC restoration, a concessional GST rate instead of full exemption, or carve-outs for essential costs like distribution and technology. They are also pushing for higher tax deductions under Sections 80C and 80D and the extension of benefits to the new tax regime.

For now, experts caution that meaningful premium reductions will require a balanced GST framework that aligns consumer relief with insurer cost realities.