Written By Ramkumar S & Bijal Khara:
The Union Budget 2023 was a bitter pill to swallow in many ways for the insurance sector, stemming from the fact that increased limit under Sections 80C and 80D, separate deduction for home insurance, relook at GST rates, and tax-free status for pension/annuity were not considered in the Budget. Instead, the Budget saw the introduction of a tax on the maturity amount of life insurance plans when the total early premium surpasses Rs 5 lakh.
It also saw annuity income received from pension plans to be taxed at the marginal tax rate in accordance with the new tax regulation. Further, the googly came in the form of a new personal tax regime, devoid of any deductions under Section 80C, with no tax for taxpayers earning income up to Rs 7,00,000, with the finance minister proposing to make the new regime a default regime. This impacted life insurance companies’ ability to sell policies as many taxpayers bought insurance policies with a view to claiming tax benefits but with no deductions on offer in the new regime making investment insurance a less attractive proposition. This was a surprise. However, the move from the finance ministry could have been owing to the uptake of insurance policies post Covid-19 where the masses felt having life and health insurance was not a choice but a necessity.
Predicting what will happen in the Insurance sector’s budget is like putting money on the ‘Indian Derby’. If you were to ask market participants, they want the finance minister to look at the GST rates, especially term insurance and health insurance plans which attract 18 per cent, while the endowment plans attract 4.5 per cent in the first year and 2.25 per cent from 2nd year onwards. While term insurance plans and health insurance are the leading products, their penetration to rural India is yet minimal. This will probably help the government achieve its ambition for ‘Insurance for all by 2047’.
The Insurance Regulatory and Development Authority of India (IRDAI) is actively working towards the development and implementation of the Indian Risk-Based Capital (Ind-RBC) Framework for the Indian Insurance Industry as part of its developmental agenda. The finance ministry may bring in measures such as new capital requirement, which may be in line with what the RBI has within terms of AT1 Bonds. With the announcement in last year’s budget of the new regime being a default regime with no deductions under Section 80C taking force, the finance minister will look at it again after the loss of lives from various natural calamities and state and central government paying compensation.
Talking about natural calamities, India is also facing challenges owing to earthquakes, floods, tropical cyclones, drought, and wildfires however, the insurance protection against natural catastrophes is meagre.
The year 2023 saw many climate-related catastrophes with widespread damage to lives and property and an anticipation from general insurers for the government to bring in a new slew of measures such as tax sops on the premium paid by the insured, especially with the advent of new infrastructure projects which are being built across the country.
On the health insurance sector, there is an anticipation of increasing deductions for medical insurance premiums with the threat of a new variant of Covid. Also, to make the National Pension Scheme an attractive investment option, the probability of allowing tax exemption over the current 25 per cent limit and also not to tax income from the annuity, which is currently taxable. While the insurance sector will have a wish list, the finance minister will have to strike an equilibrium for the economy’s health and not just one sector.
(Ramkumar S is the executive director of Grant Thornton Bharat, while Bijal Khara is associate director for financial services-risk of Grant Thornton Bharat)
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