Quick Overview
As the Union Budget 2025 approaches, the insurance sector in India is voicing critical expectations aimed at enhancing health insurance accessibility and affordability. Key proposals include reducing the Goods and Services Tax (GST) on insurance premiums, revising tax exemptions under Section 80D, and establishing a health regulator to address rising medical inflation. These reforms are viewed as essential for increasing insurance penetration and improving the overall financial landscape for consumers.
Key Points
- Reduction of GST on Premiums: The insurance industry is advocating for lower GST rates on premiums to make health insurance more affordable for consumers.
- Revisions to Section 80D: Industry leaders are calling for an increase in tax exemptions under Section 80D, particularly for senior citizens, to encourage health insurance uptake.
- Introduction of a Health Regulator: The establishment of a health regulator is proposed to manage rising medical inflation and ensure pricing consistency across healthcare services.
- Separate Tax Exemption for Term Insurance: A new tax exemption category for term insurance is suggested to enhance life insurance adoption and narrow the protection gap.
- Reform of Annuity Taxation: Revisiting the taxation structure for pension and annuity products is necessary to promote retirement planning and product adoption.
Detailed Breakdown
1. Reduction of GST on Premiums
The insurance sector is pressing for a reduction in the GST imposed on insurance premiums. Currently, the high GST rates contribute to the overall cost of health insurance, making it less accessible for many consumers. Lowering these rates is seen as a vital step to enhance affordability and encourage more individuals to secure health insurance coverage.
2. Revisions to Section 80D
Industry experts are advocating for an increase in the tax exemption limits under Section 80D, which currently allows individuals to deduct premiums paid for health insurance from their taxable income. The following changes are proposed:
- Increase in Limits: A proposed increase to Rs 50,000 for all individuals and Rs 1,00,000 for senior citizens would significantly boost insurance adoption.
- Extension to New Tax Regime: The suggested revisions should also apply to the new tax regime to further incentivize health insurance purchases.
3. Introduction of a Health Regulator
The establishment of a health regulator is seen as crucial to combat the challenges posed by rising medical inflation. Industry leaders emphasize that medical inflation can increase significantly, sometimes by nearly 15% in a three-year cycle, which is the typical duration for insurers to adjust their product prices. A dedicated health regulator would help create pricing consistency among healthcare providers, thus stabilizing costs for insurers and consumers alike.
4. Separate Tax Exemption for Term Insurance
Industry representatives, including Rajiv Gupta, President of PB Fintech, argue for a separate tax exemption category for term insurance. This move is expected to:
- Encourage Life Insurance Adoption: By providing tax incentives specifically for term insurance, more individuals may be motivated to secure adequate life coverage for their families.
- Simplify Financial Planning: A separate deduction limit for term insurance would streamline the financial planning process, making it easier for consumers to navigate their insurance options.
5. Reform of Annuity Taxation
The current taxation structure for pension and annuity products is viewed as a barrier to effective retirement planning. Industry leaders propose that:
- Exemption of Annuity Income: Taxing annuity income alongside the principal discourages individuals from investing in retirement-focused products. Exempting this income could lead to greater adoption of such products.
6. Changes to Rule 6E
A significant concern raised by industry leaders is the need to reform Rule 6E, which governs how insurers calculate reserves for unexpired premiums. The current method allows insurers to reserve only 50% of the premium for unexpired policies, which does not accurately reflect the actual time left on the policy. The proposed 1/365 method would calculate reserves based on the exact number of days remaining, aligning with global accounting practices and enhancing transparency.
Important Details & Evidence
- Current vs. Proposed Reserve Calculation:
- Current Method: Under the 50% rule, if a policyholder pays Rs 12,000 for a year and has six months left, the insurer reserves Rs 6,000.
- Proposed Method: The 1/365 method would reserve Rs 5,985 for the same scenario, providing a more accurate financial picture for insurers.
- Growth of the Insurance Sector: Shilpa Arora, Co-Founder and COO of Insurance Samadhan, highlighted that the insurance sector has seen steady growth, with 57 insurers in operation and $6.5 billion in investments over the past nine years. This growth is attributed to increased consumer awareness and innovative product offerings.
- Government Policy Impact: The government’s allowance of 100% Foreign Direct Investment (FDI) in the insurance sector is expected to spur competition and innovation, but rationalizing GST rates and introducing tax incentives are deemed essential for sustaining this growth momentum.
Final Takeaways
The insurance sector’s expectations for Budget 2025 focus on enhancing accessibility and affordability of health insurance through significant reforms. Key proposals include reducing GST on premiums, increasing tax exemptions under Section 80D, establishing a health regulator, and reforming the taxation of term insurance and annuities. These measures are aimed at improving insurance penetration, addressing the challenges posed by medical inflation, and promoting a culture of financial planning among consumers. As the sector continues to grow, the government’s response to these demands will be crucial in shaping the future landscape of insurance in India.
