The recent decision by the GST Council to exempt individual health and life insurance policies from GST after September 22, 2025 has triggered a significant shift in the insurance industry. While the move benefits policyholders by reducing their premium burden, insurers are scrambling to adjust their finances as they lose access to input tax credit (ITC) on expenses.
Insurers Cut Commissions to Offset ITC Losses
Insurance companies, including Tata AIG and Aditya Birla Health Insurance (ABHI), have already issued notices to their distribution partners announcing reduced brokerage and commission payouts effective October 1, 2025.
Tata AIG, in its communication, stated:
"With the new guidelines in place, insurance companies are no longer eligible to claim input tax credit. This will lead to an increase in costs impacting P&L and EOM of insurance companies."
It added that revised commission grids will be rolled out shortly to reflect the GST changes.
Similarly, ABHI informed partners that distributors will now have to bear the GST burden directly. With ITC no longer available on "commission, rewards and equivalent and other corporate expenses," the GST amount will be deducted from payouts.
Commission Impact for Distributors
From October 1, 2025, all fresh and renewal commissions will be treated as GST-inclusive, meaning distributors will effectively receive lower earnings. For example, if a commission of Rs 100 was earlier paid, the amount will now reduce to Rs 84.74 after an 18% GST deduction.
ABHI clarified that this adjustment is necessary to absorb the financial hit from GST exemptions, which are expected to impact insurers' profitability and expense of management (EOM) ratios.
Industry-Wide Trend Expected
With Tata AIG and ABHI leading the way, other health and life insurers are likely to adopt similar commission revisions in the coming weeks. Experts note that while policyholders gain from lower premium costs due to GST exemption, distributors and agents face reduced margins, signaling a new challenge for insurance distribution networks.
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