Budget 2021 Expectations: Tax, FDI reforms to provide much-needed impetus to insurance industry

Union Budget 2021: The low insurance penetration in non-mandatory insurance segment like health insurance has been a cause for concern for several years. Given the renewed focus on the insurance sector in light of the COVID-19 pandemic to enhance insurance coverage, industry experts believe the government should leverage the Budget 2021 to mitigate individual and industry distress to some extent possible.

Experts say, reforms in two key areas – tax and foreign direct investment (FDI) – are expected to be undertaken, as a part of the Budget 2021. From a consumer standpoint, experts believe having a separate tax deduction towards insurance premiums, over and above the current 80C limit, similar to one allowed for NPS, could benefit taxpayers. Alternatively, enhancing the insurance limits under section 80C and 80D will further encourage people to opt for life insurance.

Alina Arora, Partner, Shardul Amarchand Mangadas & Co. says, “The Government could tweak the tax regime to incentivise the taxpayer to obtain insurance through measures such as enhancement of tax rebates under Section 80C and Section 80D of the Income Tax Act. Having said that, the Government could also reduce the Goods and Services Tax currently payable on insurance premiums. These tax relaxations and incentives will go a long way in increasing insurance penetration India.”

Additionally, Rushabh Gandhi, Deputy CEO, IndiaFirst Life Insurance Company, says “Linking of Sec 10(10D) to policy persistency instead of the amount of Sum Assured i.e. Sec 10(10D) should be available for policies where minimum 5 annual premiums have been paid with a minimum policy term of 10 yrs.”

On the FDI front, experts say the Government could liberalise the FDI Regime through the Budget 2021 and raise the current FDI limits from 49 per cent to 74 per cent of paid-up equity capital. Gandhi, says “As a sector, the most recent deliberations on insurance is around the proposed increase in FDI. If the government increases the FDI limit in insurance to 74 per cent, insurers may be able to attract additional capital to expand the business and increase insurance penetration in the country. It would also potentially support the government’s divestment programme.”

Easing the FDI limits will provide a much-needed impetus to the insurance industry, which is capital-intensive and requires a sustained infusion of capital, and will fetch greater interest from investors for such infusion as they will exercise control and avail better returns. Additionally, this will also enable existing promoters to unlock better value from their investments in existing insurance ventures. Arora says, “Further, provision of control to foreign insurers will result in the introduction of global best practices, innovative products and technologies of trusted multinational insurance brands.”

Other areas of consideration include amendments in tax treatment for an annuity as proposed by PFRDA regulator i.e. making annuity income as tax-free income, leading to greater uptake in annuity policies resulting in improved financial security during post-retirement years. Gandhi, says “This recommendation is particularly critical in India which has limited social security measures. Additionally, the government could also reassess the GST rate structure for pure protection cover and offers relaxation on existing 18 per cent GST.”