India’s pushes for reintroduction of tax exemptions

Tax benefits currently exist for health and life insurance premiums, albeit capped and complex.

Insurance companies in India are appealing for an exemption from tax cuts on annuities and a reduction in GST rates applied to their offerings. 

The industry anticipates a revision of the tax framework to reintroduce exemptions for life insurance products, which were previously available under Section 80C of the old tax regime but are currently excluded under the new regime, insights from the Policy Circle revealed.

India's insurance sector is poised for robust growth despite facing regulatory challenges. Ranked as the 10th largest globally, the sector struggles with low life insurance penetration at 3.2% (as of 2021). 

Streamlining regulatory processes and reducing bureaucratic hurdles are essential to enable smoother operations and foster industry growth. 

The Insurance Regulatory and Development Authority of India (IRDAI) should continue refining policies to promote innovation and competition within the sector.

Tax benefits currently exist for health and life insurance premiums but are capped and complex, discouraging broader adoption, especially among financially constrained individuals.

To address these challenges, increasing tax deductions for insurance premiums could significantly bolster uptake and affordability. 

Simplifying the tax benefit structure would enhance accessibility for all taxpayers, regardless of their income level or financial literacy.

Moreover, leveraging technology in the insurance sector can improve accessibility and affordability. 

India faces high out-of-pocket medical expenses, surpassing global averages, indicating inadequate financial protection for citizens. 

The Policy Circle urges IRDAI should set ambitious goals for universal insurance coverage by 2047, encouraging reforms to improve implementation, increase participation from multi-speciality and corporate hospitals, and enhance outreach to underprivileged populations.

Reducing GST rates on insurance from the current 18% to 5% would make products more affordable, further promoting uptake among consumers. 

This measure, along with tax incentives, not only reduces the government's social security burden but also empowers individuals to manage their financial well-being, fostering a responsible and financially secure society.

Addressing disparities in insurance penetration between urban and rural areas is critical. 

Whilst urban regions benefit from higher awareness and accessibility, rural areas require targeted awareness campaigns and simplified insurance products tailored to local needs. 

Collaboration between the government and insurers is essential to bridge this divide effectively.

Finally, expanding long-term investment options such as 40 to 50-year bonds and corporate bonds could enhance liquidity for insurers, potentially lowering interest rates on long-term liabilities and improving returns on annuity plans. 

These measures collectively support the growth and stability of India's insurance sector whilst promoting financial inclusion and resilience across the economy.