GST Removed from Life & Health Insurance: LIC Sees ₹1,100 Crore Surge on Day One — What It Means for Policyholders & Insurers

Sep 30, 2025

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In a sweeping tax reform implemented from 22 September 2025, the Indian government removed Goods and Services Tax (GST) from individual life and health insurance policies, setting the tax rate to zero. This bold move is intended to make insurance more affordable for millions of policyholders. On the very first day of implementation, Life Insurance Corporation (LIC) recorded inflows exceeding ₹1,100 crore, signaling a strong immediate market response.

But while taxpayers cheered, insurers now face fresh challenges including reversal of input tax credit (ITC) and cost pressures. This article explores the details, impacts, benefits, and risks of the GST exemption scheme.

1. What Changed: Details of the GST Exemption

The Tax Shift

Prior to September 22, 2025, individual life and health insurance policies attracted 18% GST (plus applicable cess and surcharges).
In the 56th GST Council meeting, the tax regime was overhauled: individual health and life insurance policies were moved to the nil-GST category, effective September 22. ETBFSI.com+3The Economic Times+3www.ndtv.com+3
The reform also introduced a new two-rate GST structure for goods, though insurance is fully exempt under the revised system. The Economic Times+2ETBFSI.com+2

What Types of Policies Are Covered

Category of Policy	Covered Under Exemption	Notes
Term insurance (individual)	Yes	Protection-oriented policies now GST-free
Traditional / endowment life policies	Yes	Savings + insurance policies also included
Unit-Linked Insurance Plans (ULIPs)	Yes	Investment-linked life-insurance
Health / medical insurance (individual / senior citizen / family floater)	Yes	Health policies also moved to 0% GST
Group insurance policies	No	Group / corporate policies remain outside exemption (for now)

The exemption is specific to individual policies. Group or corporate insurance policies still attract GST under the existing slabs. ETCFO.com+3www.ndtv.com+3The Economic Times+3

2. Day One Impact: LIC’s ₹1,100 Crore Inflow

The most striking immediate outcome was LIC’s massive inflows: over ₹1,100 crore collected in a single day, thanks to pent-up demand released by the new tax relief. GST Learn+4India Today+4ETBFSI.com+4

To put it in perspective: LIC’s typical monthly retail premium income is around ₹5,000 crore. ETCFO.com+2ETBFSI.com+2 Thus, the one-day inflow represented more than 20% of the monthly average, underscoring how strong consumer response was once the GST burden was lifted.

Key Observations:

Most of the fresh inflows were for regular endowment / traditional life policies, rather than entirely new product launches. The Economic Times+3ETBFSI.com+3ETCFO.com+3
Before implementation, many customers and agents had delayed purchases, waiting for the tax relief announcement. That pent-up demand got unleashed immediately. ETCFO.com+2ETBFSI.com+2
Insiders caution that while day-one inflows are promising, long-term trends will be clearer only after several months. India Today+2ETCFO.com+2

3. Benefits for Policyholders

Lower Premium Out-of-Pocket Cost

With GST removed, the tax component embedded in premium payments is eliminated, making policies inherently cheaper. This reduction may encourage more people—especially those who were pricing-sensitive—to purchase insurance.

Increased Affordability & Inclusion

The tax relief can lower barriers to entry, making life and health insurance more accessible to households with moderate incomes.

Incentive to Commit to Bigger Premiums

Some buyers might now feel comfortable opting for higher annual premiums or more comprehensive coverages, since the incremental tax burden is removed.

Simplification & Predictability

With one less tax layer, the premium pricing becomes more transparent, reducing confusion around the “premium + GST” breakdown.

4. Challenges & Risks for Insurers

While policyholders benefit, insurers now face structural pressures and operational adjustments.

No Input Tax Credit (ITC) on Commissions and Expenses

Because policies are now GST-free, insurers can no longer claim ITC (i.e. offset taxes they paid on expenses like commission, marketing, infrastructure) for individual life/health policies. This loss of ITC could push up internal costs. ETBFSI.com+4The Economic Times+4ETBFSI.com+4

Reversal of Accumulated ITC

Insurers must reverse or neutralize accumulated ITC balances at the time of exemption. That can create immediate cash flow pressures. ETBFSI.com+3The Economic Times+3The Times of India+3

Pressure on Margins

The cost burden of commissions, distribution, and administration, formerly subsidized via ITC, may compress profitability. Insurers will need to recalibrate their cost structures, or else pass some costs to consumers. The Economic Times+2ETCFO.com+2

Uneven Benefit Across Policy Types

Term plans, which are protection-based, may see less uptake change than savings-oriented or endowment plans, since their purchase often depends more on income and coverage need than tax cost. ETBFSI.com+1

Ongoing Uncertainty in Group Insurance

Group / corporate insurance was excluded from exemption. The dual regime may cause complexity in underwriting, pricing, and product structuring. www.ndtv.com+1

5. What It Means for the Insurance Sector

The reform may catalyze medium to long-term shifts in the insurance industry:

Renewed Sales Momentum: Insurers may witness sustained growth in premium inflows as the tax advantage encourages new buyers.
Competitive Pressure: Private insurers especially may compete aggressively to capture new customers, offering better terms, easier claim logistics, and marketing campaigns around the GST relief.
Product Redesign: Insurers may rework product features (riders, premiums, tenures) to align with the new cost structure and competitive dynamics.
Commission Structures: The commission tax exemption issue could trigger demands from agents for better payout structures or incentives.
Profitability Adjustments: Insurers will have to recalibrate profit margins considering cost pressures from lack of ITC and reversal of prior credits.

6. Table: Key Metrics & Impacts

Metric / Feature	Before GST Exemption	After Exemption (Day 1 / Expected)	Impact / Observations
GST on premiums	18% + cess	0%	Immediate tax relief for buyers
LIC inflows (Day 1)	—	₹1,100+ crore	Burst of pent-up demand
Monthly retail premium benchmark	~ ₹5,000 crore	—	Day 1 inflow ≈ 20% of monthly benchmark
ITC claims by insurers	Active (commission, expenses)	Not allowed for individual policies	Insurer cost burden shifts
Policy volumes	Steady trends, some deferral	Surge expected in longer term	Growth driven initially by higher ticket sizes
Group / corporate policies	GST exempt? No	Still gen. taxed	Dual regulatory regime persists

7. What Should Policyholders Do Now?

Review Premium Breakdown: Before signing a policy, confirm that the GST component has been dropped and the insurer is passing on the full benefit.
Compare Policies Anew: With tax removed, policies that previously seemed expensive might now provide better value. Reassess term, endowment, and health policies afresh.
Lock in with Bulk / Annual Payments: If possible, pay premiums annually or in full, since savings on GST would be more substantial than paying monthly.
Check for Hidden Cost Shifts: Since insurers may need to offset ITC losses, keep an eye on premium escalations or cost surcharges in future renewals.
Document & Claim Transparently: Retain premium receipts, be vigilant about premium components, and ask insurers to provide detailed breakdowns to ensure your benefit is fully passed on.

Conclusion

The decision to exempt GST on individual life and health insurance is a strong pro-consumer step toward making protection and health cover more affordable. The ₹1,100 crore inflow to LIC on day one demonstrates both pent-up demand and clear consumer responsiveness.

However, the move is not free of trade-offs. Insurers must absorb the cost burden of lost input credits and recalibrate business models. For policyholders, vigilance is key to ensure that the benefits of the tax reform are fully passed on.

In the months ahead, the true measure of success will be whether insurance penetration rises, whether policies become more inclusive, and whether insurers adapt sustainably to the new cost structure.

Disclaimer:
This article is based on reported data and industry commentary available at the time of writing. Financial metrics, inflows, and impacts may evolve over time. Readers should verify updated reports and consult financial or tax professionals before making major decisions.

About the author

I’m Himanshu Dhar, a dedicated MIS trainer proudly associated with I Turn Institute. My journey in the realm of data management and automation spans over 14 enriching years. My passion for this field extends to freelancing projects, where I bring real-world practicality into my teaching. My impact in education is marked by the success of over 25,000 students I’ve had the privilege of mentoring, hailing from diverse backgrounds. Beyond the classroom, I’ve had the honor of conducting corporate training sessions and seminars, catering to the unique needs of businesses. Let’s unlock your potential together in the realm of data analysis and automation.