By Shailaja Lall

The continuing pandemic due to Covid-19 has demonstrated the necessity for health insurance in every household to adequately protect all family members against medical uncertainties. The health segment has surpassed the motor segment in the insurance sector after the pandemic first hit the country in March 2020, leading to an unimaginable surge in medical costs. Given the global spotlight on health insurance, any form of tax exemption for medical/ health insurance policies will greatly benefit insurance customers, as tax exemptions will trigger more interest in buying insurance and increased insurance awareness. In this regard, the following are reasonable expectations from the Finance Minister in the upcoming Budget for the insurance sector:

• GST Removal/Reduction: The government should aim to encourage purchase of health insurance so that timely medical aid is available to one and all, as even today, a large part of the population in the country still remains underinsured or uninsured. Particularly, the prevailing high GST rate of 18 per cent applicable on health insurance must be removed, in line with the GST applicable for medical services and hospitals (which is exempt from GST). The GST component of the premium is a disincentive for customers to take much needed health insurance and its removal will lead to increased levels of insurance penetration in the country, given that health insurance is an essential commodity in the present context. This focus should also extend to other forms of insurance beyond health and in promoting a higher adoption of insurance.

• Increased Tax Deduction Limits and Other Tax Benefits:

1. The Government should consider increasing the tax deduction limit under section 80D of the Income Tax Act, 1961 in respect of payment made towards premium of health insurance policies. Given the high medical costs, a higher tax rebate will ensure more disposable income thereby encouraging people to buy health insurance policies. As per Section 80D, an individual can claim deduction up to Rs 25,000 (Rs 50,000 in case of senior citizen) for health insurance premium paid for self, spouse, and family and, an additional equivalent deduction for premium paid in relation to his/her parents. This deduction can be increased to encourage more people to opt for health insurance policies which would contribute towards the growth of the insurance sector as well and ensure that the customers are not underinsured.
2. Currently, the deduction allowed under section 80C of the Income Tax Act covers a wide range of eligible investments/ expenses such as payment of life insurance premium, employee’s contribution to Provident Fund, Public Provident Fund (PPF), National Pension Scheme (NPS), housing loan principal repayment, Equity-linked saving schemes (ELSS), etc. Since term policies are cost effective ways of creating security for family members and dependents, introducing separate tax benefits for term insurance outside section 80C will help increase the insurance penetration.
3. The benefits currently available under section 80CCE of the Income Tax Act, which specifies the aggregate level of deduction (Rs 1,50,000) available in a financial year under sections 80C (EPF, PPF contributions, etc.) and 80 CCD(1) (NPS Contributions) of the Income tax Act, may be expanded.
4. Another key area where tax benefits could be introduced is in relation to separate deductions for pension products and favourable tax treatment for annuity income from such pension products. There is a need to introduce parity between annuity/pension products issued by life insurance companies, NPS and other saving products. Moreover, anomalies like double taxation in annuity payments should be addressed – in the case of pay-out under pension/ annuity policies, only the deposit amount should be taxed once the payment crosses the principal amount invested by the policyholders. This will allow for greater adoption of pension/retirement products that too at cost-effective prices.

• Privatisation of Public Sector Insurers: The Government’s plans regarding privatisation of the public sector insurance companies are expected to be detailed out in the upcoming budget, with the amendments to the General Insurance Business (Nationalisation) Act, 1972 (GIBNA) having been passed by the parliament already in August, 2021.

(Shailaja Lall is an Equity Partner at Shardul Amarchand Mangaldas & Co and heads the Insurance and Reinsurance practice of the firm.)