Fiscal Expectations: What Will Help India’s Health Insurance Industry?

By Shailaja Lall

The continuation of the Covid-19 pandemic has demonstrated the need for health insurance in every household to adequately protect all family members against medical uncertainties. The healthcare segment overtook the automobile segment in the insurance industry after the pandemic first hit the country in March 2020, leading to an unimaginable increase in medical costs. Given the global focus on health insurance, any form of tax exemption for medical/health insurance policies will greatly benefit insurance customers, as tax exemptions will generate more interest in the purchase of insurance and increased insurance awareness. In this regard, here are the reasonable expectations of the Minister of Finance in the next insurance sector budget:

• Abolition/reduction of GST: Government should aim to encourage the purchase of health insurance so that timely medical aid is available to all, as even today a large portion of the country’s population remains underinsured or uninsured. In particular, the current high GST rate of 18% applicable to health insurance should be eliminated, in line with the GST applicable to medical services and hospitals (which is exempt from GST). The GST component of the premium discourages customers from purchasing much-needed health insurance and its removal will lead to an increase in insurance penetration levels in the country, given that health insurance is a critical commodity in the current context. This attention should also extend to other forms of insurance beyond health and promote greater uptake of insurance.

• Increase in tax deduction limits and other tax advantages:

1. The Government should consider raising the limit on tax deductions under Section 80D of the Income Tax Act 1961 in respect of the payment of premiums for health insurance policies. In view of the high medical costs, a higher tax refund will ensure more disposable income, thereby encouraging people to purchase health insurance policies. According to Section 80D, a person can claim a deduction of up to Rs 25,000 (Rs 50,000 in case of elderly person) for the health insurance premium paid for himself, his spouse and his family and, a additional equivalent deduction for the 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 also contribute to the growth of the insurance industry and ensure that customers are not underinsured.
2. Currently, the deduction allowed under Section 80C of the Income Tax Act covers a wide range of qualifying investments/expenses such as payment of life insurance premium, contribution of employed in Provident Fund, Public Provident Fund (PPF), National Pension Scheme (NPS), home loan principal repayment, Equity Linked Savings Schemes (ELSS), etc. Since term insurance policies are cost-effective ways to create security for family members and dependents, the introduction of separate tax benefits for term insurance outside of Section 80C will help increase 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, can be extended.
4. Another key area where tax benefits could be introduced relates to separate deductions for pension products and the favorable tax treatment of annuity income from such pension products. There is a need to introduce parity between annuity/retirement products issued by life insurance companies, NPS and other savings products. Additionally, anomalies such as double taxation in annuity payments should be corrected – in the case of pension/annuity policy payments, only the deposit amount should be taxed once the payment exceeds the principal amount invested by policyholders. This will enable greater adoption of pension/retirement products at attractive prices.

• Privatization of public sector insurers: Government plans for the privatization of public sector insurance companies are expected to be detailed in the upcoming budget, amendments to the General Insurance Business (Nationalization) Act 1972 (GIBNA) having been adopted by Parliament already in August 2021.

(Shailaja Lall is a capital partner at Shardul Amarchand Mangaldas & Co and leads the company’s insurance and reinsurance practice.)