Budget 2024 Falls Short! Insurance Sector Left Wanting Amid Rising Premiums Rates, Need For More Penetration

Union Budget 2024, while introducing some major relief measures for various sectors, has left the insurance sector yearning for more substantial support from a policyholder’s point of view. This is ever more concerning amid the rising premiums and medical inflation that continue to challenge policyholders.

The increase in the standard deduction from Rs 50,000 to Rs 75,000 in the new tax regime is a welcome move for those eligible. The insurance industry, however, anticipated specific tax incentives to make insurance products more affordable, particularly health and life insurance.

A Mixed Bag Of Relief & Disappointments

Economic growth, an expanding middle class, innovation, and regulatory support have historically driven the insurance market in India. However, the latest budget measures fell short of addressing the critical issue of affordability in the face of post-Covid recovery and medical sector inflation.

"The budget could have pushed more reforms for the insurance sector by allowing more tax exemptions for health and home insurances in order to move one step further for insurance for all vision by 2047," says Yashesh Sampat, an insurance industry veteran, CA Practioner and Fellow from Insurance Institute of India (III).

Sampat adds, "What our country requires is a necessity push for all to come under umbrella of insurance care and GST reduction also could have played a better role for affordability and purchasing power to go up for insurance. Insurance industry doesn’t seems to be too happy on what was in store for them this budget."

Why should govt consider waiving GST on insurance premiums?

“The industry expected a GST waiver or reduction for insurance, or a tax deduction increase to Rs 1 lakh. With ongoing public health challenges, there was a necessity for stronger support for health insurance, including subsidies to broaden coverage. As insurance premiums rise due to post-COVID recovery and health sector inflation, policy measures could have helped achieve 'Insurance for All' by 2047’, says Narendra Bharindwal - Vice President, Insurance Brokers Association of India (IBAI).

According to the Economic Survey 2023 report, released on 22 July, premium growth moderated slightly in FY23 compared to the previous year, reflecting still-in-process adjustments to the post-COVID-19 era. 

Overall insurance penetration in India moderated slightly to 4 per cent in FY23, from 4.2 per cent in FY22. During the same period, insurance penetration in the life-insurance segment declined from 3.2 per cent in FY22 to 3 per cent in FY23, while it remained flat at 1 per cent for the non-life insurance segment.

These figures highlight the need for stronger policy measures to push insurance uptake among the population. GST waivers, tax incentives, and increased awareness could be a few much-needed measures towards the same.

“Govt must consider reducing GST on premiums because it impacts the net return in comparison to mutual funds. Middle class still invest in insurance and their net gain reduces by at least 1 per cent. Govt can increase penetration by reducing the tax on premiums paid by policyholders,” says Shilpa Arora, Co-Founder and Chief Operating Officer, of Insurance Samadhan.

Also read; Union Budget 2024: FM Sitharaman Simplifies TDS Rates, Charity Tax; Announces More Relief For Taxpayers

The Impact of Rising Premiums and Inflation on Pockets of Individuals

Many citizens looking for good health insurance often find themselves at the crossroads of choosing between necessary coverage and financial strain at the hands of big premiums. Without significant government intervention, this trend is likely to persist, potentially slowing the overall growth of insurance penetration in the country.

“Unlike life premiums, health premiums may change with claim experience and inflation. Though the government is taking the right steps by adding no-frill products, more incentives are required to make health insurance premiums affordable especially for older people,” Arora opines.

TDS Rate Slash on Life Insurance Payouts

Union Budget 2024 has also proposed that the Tax Deducted at Source (TDS) on life insurance payouts be reduced from the current rate of 5 per cent to 2 per cent. It is being said that the policyholders will receive a larger payout from their life insurance policies as a result of this reduction in the TDS rate.

“This has no impact because in most products TDS is not applicable. Even if it applies then TDS is an advance tax that is regulated when you file returns. So it has no (immediate) impact for policyholders but it will give more money into the hands of insurance agents which gives them more money to spend,” states Arora.