Budget 2025: Tax Breaks, More Accessibility; Here's What Life Insurance Sector Wants

With Budget 2025 just around the corner, the life insurance sector is eagerly looking forward to some tangible initiatives that can help the sector reach more customers. This is the need of the hour, given how insurance penetration in the country has slipped to 3.7 per cent in the 2023-24 financial year, down from 4 per cent in the previous year, according to the report by the Insurance Regulatory and Development Authority of India.

Irdai has long since called for the industry to work towards the target of ‘Insurance for All by 2047’. The question, however, is whether the upcoming budget will deliver measures that can make this a reality.

Also Read: Outlook Money's Exclusive Budget 2025 Coverage

Tax Incentives For Greater Adoption

Industry leaders are calling for tax relief to make policies more attractive for individuals. As Narendra Ganpule, Partner at Grant Thornton Bharat states, “As India looks to solve the dual problem of un-insurance and under-insurance, Government schemes (like PMJAY, PMJJBY) have been focusing on providing the basic cover. The next thing to solve is how do we provide cover that’s meaningful enough to address the financial burden.”

And for that, he states, “We need ‘pull’ factors or enablers that make people buy insurance. Empirically we have seen that tax breaks work very effectively to that end. So, a specific carve-out that will offer exemption or deduction for insurance will go a long way in achieving the espoused goal.”

Tarun Chugh, MD and CEO of Bajaj Allianz Life echoes that potential income tax cuts could enhance disposable income, making life insurance more accessible to individuals. Chugh has further stressed the importance of a separate tax deduction for term insurance and an extension of tax deductions on life insurance premiums under the new tax regime.

Such initiatives, experts believe, will incentivise people to invest more in their financial security.

Similarly, Subhrajit Mukhopadhyay, Executive Director, Edelweiss Life Insurance opines that the Section 80C deduction limit, which has largely remained unchanged over the years, might benefit from an increase to address rising living costs and the growing financial pressures on people. “A more segmented approach could be beneficial, carving out a separate deduction for the insurance sector,” he states,

Pension Plans and Retirement Concerns

Says Chugh, “With the elderly population (50+) projected to grow by 22 per cent in the next six years, incentivising pension product is imperative.”

He further believes that aligning tax deductions of life insurance annuity products with the National Pension Scheme (NPS) and addressing the issue of tax on the principal component of annuity products can evolve retirement needs effectively.

Increase In Exemption Limit For Life And Health Plans

Looking forward to Budget 2025, Hanut Mehta, CEO and co-founder at Bimapay Finsure states “We're expecting the increase in exemption limits for health and life insurance premiums. In a country where rising medical costs and inflation provide financial concerns, this step is intended to encourage more individuals and families to prioritise insurance as an essential component of their financial planning.”

“By increasing tax deductions whether under Section 80D for health insurance or Section 80C for life insurance, the government can promote long-term financial security while making quality insurance more affordable,” he adds.

Industry Pushing For Policy Reforms

Beyond tax incentives, the industry is also looking for some regulatory changes.

“The insurance sector, in particular, is closely watching this budget, not only for the potential regularisation of tax provisions but also for the rationalisation of certain regulatory changes,” Says Manoj Purohit, Partner and Leader, FS Tax, Tax & Regulatory Services, BDO India.

Purohit states that with the implementation of IndAS 117 on insurance contracts, insurers will be required to enhance the transparency of their financial statements and performance.

This new framework will bring challenges related to the application of the current value approach for measuring insurance contracts, which could impact the estimation of future cash flows, unearned profits spread over the term of contracts, and risk management practices associated with each insurance policy.

“As these elements are reflected in insurers’ financial statements, they would also have a direct impact on the taxation of life insurance companies, which are taxed based on the surplus determined by actuaries. To address these challenges, the Budget 2025 should introduce a holistic tax regime that aligns with these new financial reporting standards.”

GST Reduction, Focus On First-time Buyers

Another long-standing concern for both the industry leaders and customers is the 18 per cent GST applied on insurance premiums. To bring relief, the Standing Committee on Finance, led by Jayant Sinha has recommended reducing the GST rate on term and health insurance products. The idea is to make policies more affordable and encourage more people to opt for life or term coverage.

Some industry leaders have further called for initiatives that incentivise policy adoption by women and first-time buyers. Says Mukhopadhyay, “Considering the low single-digit penetration of life insurance in India, tax incentives can be expected to be focused on first-time life insurers and on the principal component of annuity income. Special incentives may also be announced for women who currently account for barely more than one-third of the country’s life insurance covers.”