How GST & Tax Reforms Are Changing Insurance Buying Behaviour in India (2026 Guide)

India’s insurance market is undergoing a significant transformation — not just in terms of product innovation and digital adoption, but also through widespread tax reforms that are reshaping how consumers buy insurance. One of the most impactful changes has been the Goods and Services Tax (GST) revision on insurance premiums, particularly for life and health insurance. These changes have immediate implications for affordability, demand, and buying behaviour among Indian policy-buyers.

In this in-depth blog, we break down what these reforms mean, how they are altering the insurance landscape, why this matters to policy buyers, and what behavioural shifts we are seeing in 2026.

1. The GST Revolution for Insurance in India

When GST was introduced in 2017, insurance premiums were placed in the 18% tax bracket, making insurance one of the more costly services for middle-class and retail buyers. This tax was added on top of the base premium, increasing the upfront cost for many buyers. However, in 2025, the GST Council approved a historic move — reducing GST on individual life and health insurance premiums to zero effective 22 September 2025.

👉 What Exactly Changed?

·        GST on individual life insurance premiums — 0%

·        GST on individual health insurance premiums — 0%

·        Group policies and commercial insurance treatments remain under review or different tax treatments

This shift effectively eliminates the 18% levy that retail buyers were previously paying, simplifying the cost structure for buyers and potentially reducing the barrier to purchase.

2. Why the Government Took This Step

The decision to exempt individual life and health insurance from GST is rooted in several policy objectives:

✔ Boost Insurance Penetration

India’s insurance penetration — the ratio of total premiums to GDP — has historically lagged behind many developed and emerging markets. Removing GST lowers barriers, especially for first-time buyers and lower-income segments.

✔ Encourage Long-Term Protection

Life and health insurance are critical tools for financial security. Lower taxes make these products more attractive, especially for younger buyers, families, and senior citizens seeking sustained protection.

✔ Promote Economic Well-Being

Reducing indirect taxes on essential financial products aligns with broader economic reforms geared toward relief for the middle class and boosting household financial resilience.

3. Immediate Impact on Insurance Buyers

🧾 Lower Out-of-Pocket Costs

With the GST removed, consumers directly benefit from lower total premiums — at least in theory. For example, a term insurance policy that cost ₹30,000 plus 18% GST (₹5,400) would now cost only ₹30,000, offering significant upfront savings.

💡 Accessibility for First-Time and Price-Sensitive Buyers

Price-sensitive segments — such as young professionals, gig workers, and micro-entrepreneurs — are typically more responsive to changes in cost structures. Lower tax burdens encourage these groups to enter the insurance market, driving higher policy take-up and renewal rates.

📊 Boost for Policy Renewals

Not just new buyers but existing customers are also influenced. Renewals often drop if customers find premiums expensive; tax savings help retain more policyholders.

4. How This Shapes Buying Behaviour

🧠 Mindset Shift: Insurance as Necessity, Not Luxury

Historically, many consumers treated insurance as a non-urgent expense — something to consider only when absolutely necessary. With the tax burden removed, insurance starts to be perceived more as a budget-friendly financial safety net rather than an annual burden.

📅 Timing of Purchase and Renewals

Many consumers now strategize when to buy or renew policies based on tax benefit timing. For example, data from policy platforms showed increased searches and purchases around late 2025, as people anticipated savings from the new GST regime.

👨‍👩‍👧 Mobile and Online Buying Surges

Digital adoption in insurance was already trending, but the reduced tax burden has accelerated online policy purchases, especially among millennials and tier-II/III city consumers who use price comparison tools and mobile apps to find affordable plans.

5. What Insurers Are Doing in Response

While consumers stand to benefit, the impact on insurance companies is more nuanced.

💸 Loss of Input Tax Credit (ITC)

Under the old GST regime, insurers could claim Input Tax Credit (ITC) on GST paid for business activities such as agent commissions, marketing services, office rent, and professional services — offsetting part of their tax burden. With GST exemption on premiums, this benefit disappears, increasing the net cost burden on insurers.

💼 Operational Adjustments

To absorb the impact of losing ITC, many companies are:

·        Optimising operational costs

·        Repricing products

·        Adjusting commissions for intermediaries

·        Enhancing digital distribution to lower costs

The result is an intricate balancing act — insurers aim to keep premiums attractive while managing profitability.

📉 Effect on Agents and Brokers

With the loss of ITC, companies have reduced traditional agent commissions (by around 15–18%) to offset financial pressures. This is reshaping the distribution landscape and incentivising alternative channels like direct online sales.

6. The Real vs Perceived Benefit

While zero GST on premiums sounds like a clear win for consumers, the real benefits may vary:

✔ Savings May Not Fully Match 18%

Several industry experts and consumer observers note that insurers might adjust base premiums upward to cover the cost of losing ITC. This means actual savings for buyers could range between 5–18%, depending on pricing decisions.

✔ Impact on Renewals and Pricing Transparency

The benefit for older, existing policies may only show up at renewal time if insurers adjust future premium rates. Buyers should focus on total cost and coverage rather than just headline tax savings.

7. What This Means for Customers in 2026

📈 More Competitive Pricing Across Products

With tax reforms and increased competition, term insurance, health plans, and annuity products are likely to see greater pricing transparency and competitiveness. Buyers may find better deals, especially when comparing plans online.

 Advice for Buyers

·        Don’t delay coverage: Buying or renewing later in the year could capture benefits from favourable pricing cycles.

·        Compare brands and distribution channels: Online platforms, direct insurer portals, and aggregator sites often offer competitive prices with tax savings reflected.

·        Focus on total value: Evaluate coverages, riders, claim settlement ratios, and pricing before decision — not just tax savings.

📊 Greater Financial Awareness

Tax savings have a psychological effect: consumers now actively research policies and seek out smarter options. This change in behaviour contributes to a more informed insurance buyer ecosystem.

8. The Bigger Picture: Financial Inclusion & Economic Impact

The GST reforms align with broader national objectives:

·        Enhancing financial inclusion

·        Reducing household financial stress

·        Encouraging long-term financial planning

·        Supporting economic resilience through risk protection

With more households entering the insurance fold, India moves closer to international benchmarks in insurance penetration and coverage.

Conclusion:

A Transformative Shift in Insurance Buying Behaviour

GST and tax reforms in India are not just regulatory changes — they are behavioural catalysts. By lowering the cost of ownership for life and health insurance, the government has nudged consumers toward greater financial security and risk preparedness.

From first-time buyers entering the market to seasoned investors re-evaluating renewal strategies, tax reforms are redefining how India thinks about, and buys, insurance.

While insurers recalibrate margins and distribution models, customers stand to gain in affordability, choice, and financial literacy. Ultimately, this isn’t just a tax story — it’s a shift toward a more insured India.