The Union Budget 2023 — the most eagerly awaited financial event of the year — is just around the corner. This Budget comes at a time when India is on a path to recovery from the impacts of the COVID-19 crisis. It also comes at a time when developed nations across the world are facing economic slowdown, or even recession, whereas India’s economy is showing resilience. Against such a backdrop, this budget assumes greater significance.
Historically, an Indian household’s financial portfolio has always included insurance as a core component. The two COVID years have further shown the value of insurance as something that goes beyond just a tax-rebate instrument. There has been a dramatic surge in demand for health insurance over the last few years. In fact, the sector has been recording double-digit growth and has the potential to maintain the pace for the next few decades fuelled by digital adoption, modernisation coupled with product innovation and the consumer-centric approach.
To further build on this momentum, the insurance sector expects, and strongly supports, higher tax exemptions and other tax incentives to fuel insurance adoption in India. Since the 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 reformation. Here are a few expectations the insurance sector has from this year’s Budget:
Separate Exemption Category for Pure Term Insurance
Although there has been considerable growth in insurance awareness as a result of the COVID-19 pandemic, adoption still has a long way to go. For the time being, the life insurance premium is exempt from taxes under Section 80C, with a maximum exemption amount of Rs 1,50,000. However, other allowable expenses, such as public provident funds, repayment of housing loans, etc, cause this limit to be exhausted.
Taxpayers are not sufficiently encouraged by this to choose a term insurance plan with a higher cover. However, the creation of a distinct category will aid in promoting adoption. We propose the introduction of a separate deduction from taxable income of Rs 50,000 for payments made for pure term insurance premiums.
More Tax Incentives for Health Insurance Under Section 80D
Even before the global pandemic began, Section 80D of the Income Tax Act functioned as a catalyst to encourage health insurance use and awareness. However, since the outbreak, the general public has been considerably more accepting of health insurance. This is a fantastic opportunity to further encourage the taxpayers by offering a bigger tax exemption level under Section 80D because health insurance remains an absolute necessity.
We suggest raising the present deduction for self, spouse, and dependent children from Rs 25,000 to Rs 50,000; the exemption for parents that are non-senior citizens from Rs 25,000 to Rs 50,000; and for senior citizen parents from Rs 50,000 to Rs 1 lakh. To further bring down the cost for the end-consumer, the GST rate on health insurance should be reduced from 18% to 5%.
Annuity Income Be Made Tax-free
The prevalent tax rate for annuity income earned from a pension plan is equal to the retiree’s income tax bracket. The full annuity income is taxed even if the pension from an annuity plan is made up of both principal and investment returns. This is in contrast to products like fixed deposits, post office schemes, or mutual funds, where only the investment’s gain or income is taxed. Therefore, in order to encourage more people to use pension products, we advise making annuity income from these products tax-free.
These proposals are intended to positively contribute to increased social and financial security through insurance, keeping in mind India’s underdeveloped insurance market and the urgent need for its higher adoption. While there have been a number of policy changes to simplify rules and digitise insurance, especially in light of the pandemic, these modifications will further encourage higher and widespread usage.
The article has been written by Sarbvir Singh, chief executive officer at PolicyBazaar.com.
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