GST Cut on Insurance Premiums: What’s Changing, What It Means & How Incentivate Helps

Introduction

The Indian government has recently announced a major change in how health and life (term) insurance premiums are taxed. As per the 56th GST Council meeting, the 18% GST on individual health and term insurance premiums has been removed, effective from September 22, 2025.

Until now, customers were paying a significant tax on top of their premiums, making policies expensive and often unaffordable for households. With GST exemption, the upfront cost of insurance will drop, making coverage more accessible.

Why Input Tax Credit (ITC) Matters

While the GST rate has been reduced to zero, the absence of Input Tax Credit (ITC) complicates things for insurers. ITC usually allows companies to offset the GST paid on expenses such as agent commissions, reinsurance, or operational costs. Without ITC, insurers may face higher net costs, even if premiums fall for customers.

Impacts of the GST Cut

1. Cheaper Premiums for Consumers

Premiums are expected to fall by 12–15%, particularly for health insurance. This makes insurance more affordable and encourages wider adoption, especially among families who previously avoided it due to high costs.

2. Boost in Demand

Lower premiums will likely increase policy renewals and new purchases. For health insurance, in particular, affordability is a huge driver of demand. This move supports the government’s push for financial inclusion.

3. Short-Term Margin Pressure for Insurers

While consumers will enjoy immediate relief from lower premiums, insurers are likely to experience pressure on their margins in the short run. One reason is that existing policies typically take 12–18 months to be repriced, meaning the financial benefits of the GST cut won’t be reflected right away. At the same time, the removal of input tax credit (ITC) keeps expenses such as commissions and reinsurance costs high, leaving insurers with little room to absorb these outlays.

According to HSBC, this transition could worsen insurers’ combined ratios, which are measured as claims and expenses against premiums, by 3–6% in the near term, further squeezing profitability before long-term gains are realized.

4. Revenue Shortfall for the Government

The government may lose approximately $1.2–1.4 billion annually in GST revenue from insurance premiums. However, this could be offset in the long run through higher policy penetration.

5. Long-Term Opportunities

Despite the short-term hurdles, the long-term outlook for insurers is promising. The removal of GST is expected to drive greater insurance penetration nationwide, making coverage more accessible to a broader segment of the population. As policy volumes increase, insurers will benefit from improved economies of scale, enabling them to spread costs more effectively. Over time, this shift will also create room for competitive differentiation, with insurers who manage their cost structures well and build efficient distribution networks gaining a clear edge over their peers.

What This Means for Insurers in Practice

Consumers will pay less on new and renewed premiums after Sept 22, but the savings won’t always be the full 18% due to ITC-related costs. Insurers will need to rebalance pricing, optimize expenses, and rethink profitability for at least the next 12–18 months. Distribution channels involving agents, brokers, bancassurance, and digital will face adjustments in commission structures and acquisition costs. The government will closely monitor the revenue implications and may refine the ITC rules if insurers face excessive strain.

How Incentivate Can Help Insurers With This Shift

The GST change is not just a tax tweak, it’s a structural shift in the insurance business model. Here’s how Incentivate can add value during this transition:

1. Reframing Incentive Strategies

Align your incentives with margins. With tighter profitability, incentives need to move beyond rewarding volume alone. Performance models reward retention, cost efficiency, and customer lifetime value. With dynamic feedback loops, Incentivate enables real-time tracking, so insurers don’t have to wait 12–18 months to see this impact. Incentives can be adjusted as margins evolve.

2. Connecting Cross-Functional Metrics

The GST cut touches sales, operations, and finance functions simultaneously. Incentivate unifies these data points to help insurers measure:

-Acquisition costs vs net premium collected

-Commission payouts vs retention impact

-Renewal profitability vs new business costs

This cross-functional visibility helps leaders design smarter, more resilient incentive structures for their salesforce..

3. Scenario Planning & Forecasting

Uncertainty keeps you guessing with no clarity. Will ITC be allowed later? How much of the premium drop will insurers pass on? With Incentivate, insurers can simulate multiple scenarios, such as:

-Zero GST with no ITC

-Reduced GST with partial ITC

-Volume growth at different price points

This helps design incentive plans that withstand shifting regulatory or cost structures.

4. Incentivizing Efficiency

If expenses take center stage, then efficiency becomes a competitive weapon. Incentivate helps insurers:

-Reward agents for cost-effective sales (e.g., digital-first acquisitions)

-Encourage faster, smoother claims processing to improve combined ratios

Support innovation by offering incentives for exploring new distribution channels, such as microinsurance or online aggregators, to drive growth and enhance customer experience.

5. Driving Growth Strategically

With premiums falling, demand is expected to surge, particularly in tier II/III cities and rural markets. With Incentivate, you can tweak differentiated incentive plans that:

-Reward agents tapping new geographies

-Recognize cross-selling (health + life bundles)

Encourage customer education and awareness campaigns.

6. Managing Short vs Long-Term Trade-Offs

Short-term: Protect margins by implementing guardrails on incentive payouts.

Long-term: Build scalable growth with incentives that reward volume, penetration, and customer satisfaction.

Incentivate’s Strategic Operating System for Sales Performance enables insurers to balance these trade-offs by combining engineered incentives, unified data operations, and governance into a single platform.

Closing Thoughts

The GST cut on insurance premiums is a two-way street: it boosts affordability for customers while creating margin headaches for insurers. Over time, however, it promises deeper insurance penetration and a stronger market.

For insurers, the challenge is clear: adapt quickly, control costs, and rethink incentives. That’s where Incentivate steps in: by helping insurers engineer smarter incentive programs, integrate cross-functional data, and simulate scenarios, ensuring they can thrive in both the short-term instability and long-term growth.