Scrapping GST on health insurance should lower premiums, but without input tax credit, consumers may not fully benefit
Over the years, as healthcare costs have risen, having health insurance has increasingly become a priority for people. But, insurance premiums too have risen significantly, making health insurance policies expensive and, in turn, out of reach for many. Finally, there is some relief.
Over the past 12-18 months, as voices have grown over rising premiums, insurance companies started batting for a reduction in GST on health insurance. Insurance premiums were taxed at 18 per cent and so any reduction there would bring a sizeable relief, they had pointed out.
Well, the GST Council has now reciprocated by removing the GST altogether on individual health and life insurance policies.
According to an earlier study by Aon, while the general inflation rate in India stood at 4.4 per cent in 2024, the gross annual medical trend rate was 12 per cent higher and was projected to rise further to 13 per cent. The withdrawal of GST means the insurance premiums policyholders pay should come down as companies pass this reduction. But, without input tax credit, it may not translate directly into 18 per cent savings for policyholders.
"From a consumer standpoint, the immediate benefit is that it directly translates to enhanced affordability. By reducing the cost barrier, we anticipate a substantial increase in accessibility, making essential health coverage attainable for a wider demographic," said Samir Shah, executive director and CFO of HDFC Ergo General Insurance Company.
Tapan Singhel, the MD and CEO of Bajaj Allianz General Insurance, agreed that bringing health insurance under the nil GST bracket would make healthcare protection more affordable and accessible for millions of Indians.
"At a time when medical inflation is rising steeply, this step directly benefits citizens and eases the financial burden on families," he said, and feels this will accelerate insurance penetration.
Hanut Mehta, the CEO and co-founder at BimaPay Finsure, a premium financing company, says this move will bring in two changes. In the short term, the financing ticket size per customer will come down since the tax element is no longer there, he pointed out. Secondly, customers could now opt for greater coverage, in turn strengthening protection levels.
"Lower entry cost will push more people, especially first-time buyers, towards buying insurance. The price reduction also makes room for people to consider a higher sum insured," said Mehta.
On the face of it, the GST cut to zero means insurance premiums should straight away decline 18 per cent. But, experts like Mehta also warn that in the absence of input tax credit on the insurer side, the operational costs will increase, and over time, some of these costs may flow into base premiums.
As an end user of a policy, there was no option to claim input tax credit. But, insurers could claim input tax on the GST paid on various goods and services like IT systems, office rents, etc. By claiming this credit, the insurer's tax burden would come down. That may not be possible now.
Shah of HDFC Ergo also said that the company is closely analysing the implications concerning input tax credit.
"While it is anticipated that there will be a lowering of the premiums due to the lowering of the taxes, we are yet to understand the extent of this reduction as this will also depend upon the availability of the input tax credit, which will become clearer over the coming days," he said.
Some analysts indicate that with nil GST, but no input tax credit, health insurance premiums could still come down by around 15 per cent. More clarity should emerge in the coming days.
Business