Union Budget 2023 – the most eagerly awaited financial event of the year – is just around the corner. This budget has come at a time when India is well on its way to recovering from the effects of the COVID-19 crisis. It also comes at a time when developed countries around the world are facing economic slowdown or even recession, while India’s economy is showing resilience. In such a situation, the importance of this budget increases further.
Historically, the financial portfolio of an Indian household has always included insurance as a core component. The two Covid years have shown the value of insurance as something that goes beyond just a tax-exempt tool. There has been a dramatic jump in the demand for health insurance over the last few years. In fact, the sector is registering double digit growth and has the potential to sustain the pace of digital adoption, modernization as well as product innovation and consumer-centric approach for the next few decades.
To further accelerate this momentum, the insurance sector expects and strongly favors higher tax exemptions and other tax incentives to boost insurance adoption in India. Since growth in the insurance sector has the potential to directly aid India’s global aspirations, Budget 2023 could prove to be a catalyst for its reform. Here are some of the expectations of the insurance sector from this year’s budget:
Separate discount category for pure term insurance
Although insurance awareness has increased significantly as a result of the COVID-19 pandemic, there is still a long way to go for adoption. At present, life insurance premium is exempt from taxes under section 80C, with a maximum exemption amount of Rs 1,50,000. However, other allowable expenditure, such as Public Provident Fund, housing loan repayment, etc., cause this limit to be exhausted.
This does not sufficiently incentivize taxpayers to opt for term insurance plans with higher covers. However, the creation of a separate category would help boost adoption. We propose to introduce a separate deduction from taxable income of Rs 50,000 for payment made towards net term insurance premium.
More tax incentives for health insurance under section 80D
Even before the pandemic began, Section 80D of the Income Tax Act acted as a catalyst to encourage awareness and usage of health insurance. However, since the outbreak, the general public is becoming much more accepting of health insurance. This is a great opportunity to further incentivize taxpayers by offering higher tax exemption levels under section 80D as health insurance is an absolute necessity.
We suggest increasing the current deduction from Rs 25,000 to Rs 50,000 for self, spouse and dependent children; exemption from Rs 25,000 to Rs 50,000 for non-senior citizen parents; and Rs 50,000 to Rs 1 lakh for senior citizen parents. To further reduce the cost to the end consumer, the GST rate on health insurance should be reduced from 18% to 5%.
make annuity income tax-free
The prevailing tax rate for annuity income earned from the pension plan is equal to the income tax bracket of the retiree. The full annuity income is taxed, even if the pension from the annuity plan is made up of both principal and investment returns. This is in contrast to products such as fixed deposits, post office schemes or mutual funds, where only investment gains or income are taxed. Therefore, to encourage more people to use pension products, we recommend that annuity income from these products be made tax-free.
These proposals aim to positively contribute to enhancing social and financial security through insurance keeping in mind the underdeveloped insurance market in India and the urgent need for higher adoption. While several policy changes have been made to ease regulations and digitize insurance, especially in light of the pandemic, these amendments will further encourage higher and wider utilisation.
This article has been written by Sarbveer Singh, CEO, Policybazaar.com.
Disclaimer:The views expressed in this article are the author’s own and do not represent the stand of this publication.
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