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Budget Expectations 2022: Hike tax benefits, reduce GST rate to enhance insurance penetration

Although, there is no dearth of insurance providers in India, the rate of insurance penetration is very low in the country.

Budget 2022, Union Budget 2022-23, Budget Expectations 2022, insurance, life insurance, health insurance, home insurance, income tax, tax deductions, GST, insurance penetration
The ongoing Covid-19 pandemic has highlighted the need for insurance cover.

The ongoing Covid-19 pandemic has highlighted the need for insurance cover. While a high rate of hospitalisation has increased the importance of having a health insurance cover, the loss of lives due to Covid-19 infection and co-morbidity has made us realise the significance of having life insurance.

Although, there is no dearth of insurance providers in India, the rate of insurance penetration is very low in the country.

“While the global insurance penetration rate is 7.1 per cent, in India, it is 4.2 per cent, much less than the global average. The general insurance (non-life segment) penetration in India stands at just 1 per cent. With India aiming to become a $5T economy by 2024-25, it’s important that we fence the large financial risk of the masses of the people as they remain uninsured- across life, health and general/asset categories,” said Suvendu Prusty, Co-Founder, Director, and Principal Officer, Riskcovry.

“As a nation, we need to increase insurance adoption with a special focus on getting India’s un-insured on the bandwagon. For this, all stakeholders including the insurance industry, government, regulator, and the ecosystem as a whole need to work towards fixing teething trust issues that have historically brought friction in enabling adequate insurance adoption,” he added.

Mentioning some of the reasons for the low insurance penetration, Prusty said, “Major lack of awareness among customers on why insurance is important, lack of clarity on the scope of coverage and benefits, lack of trust in life cycle process, especially during claims, and more importantly, weak economic conditions of Indians inhibiting access and affordability of required coverage. Though a lot has been done recently – with insurance companies increasing transparency, the strict surveillance and regulations of IRDAI on Insurance companies thereby improving claim experience and government releasing budget friendly schemes for low-income households – a lot remains to be done.”

“India has as many as 24 life and 34 general insurance companies. The customers are spoilt for choice, and there is a dire need to create more customer-centric products that customers see value in. But at the same time, the insurance industry also faces challenges with the current sluggish economy, increasing frequency of catastrophic events (like the pandemic), maintaining liquidity, and to remain ahead with usage of new technologies. With the pandemic, customers have recognised the need for insurance with more people buying Health and Life insurance policies, so the focus is shifting towards digital-first, simple, micro-insurance products that customers can trust, see value in and fit into their pockets (a very important factor),” he added.

The insurance penetration level may also be increased by lowering the amount of premium by removing or reducing the rate of Goods and Services Tax (GST) and providing higher tax benefits on the premium paid.

Talking on the importance of increasing the penetration of health insurance, Srinath Mukherji, Co-Founder, SANA Insurance Brokers Pvt Ltd said, “Health insurance is no longer an option but a necessity, the importance of which was reinforced during the pandemic. However, India still remains largely underinsured due to household budget constraints, which can be corrected to a large extent.”

Mukherji suggests the following measures that may be taken in the upcoming Union Budget for 2022-23 to increase the health insurance penetration:

Reduction in GST

Imposing 18 per cent GST on health insurance premiums is a deterrent for the uninsured consumer to seek health insurance which is indispensable, now more than ever. Given that healthcare services carry nil to low GST in our country, nullifying the health insurance tax rate or reducing it to make it commensurate with medical services taxation will be a huge incentive for buyers, and will make health insurance more affordable for the middle- and lower-income groups.

Higher Tax Benefits on Premiums

The present tax deduction rate on health insurance premiums as per Section 80D of the Income Tax Act should be increased. It is recommended to double the 80D limits from the current levels of Rs 25,000 for individuals and Rs 50,000 for senior citizens. These limits have not been revised for a few years now. Furthermore, the pandemic has led to increase in medical inflation as well as health insurance premiums. Increasing the tax benefits would motivate personal financial planning while boosting the disposable income of the working-class populace. This could in turn be utilized to opt for more comprehensive health insurance plans with enhanced sum insured and coverage. It would also help to improve health insurance penetration by encouraging people to purchase medical insurance, thereby allowing access to much needed high-quality medicare and treatment.

Prusty also suggests some measures, which may be considered in the forthcoming budget to increase the insurance penetration in India:

  • We should aim to incentivise citizens to have their own health insurance plan by reducing the GST on the premium paid, which currently stands at a whopping 18 per cent.
  • Under Sections 80C and 80D of the Income Tax Act, we can increase the existing tax deduction limit for life, health and home insurance.
  • Life insurance premium paid currently forms a part of various other investment tools under 80CC deductions. Ideally, we must create a separate limit for life insurance premiums paid for protection or endowment or pension. This will attract citizens to purchase insurance.
  • Enable further Public-Private Partnership of social-welfare programs like Jan Dhan Yojana, Fasal Bima Yojana etc. so that the entire ecosystem can together solve barriers resulting from a large-scale implementation.
  • The recent pandemic and natural calamities have emphasised the importance of healthcare and home insurance on the economy, and the need to increase insurance penetration and density in India. One way of ensuring this is by making health and home insurance mandatory for families with a household income of more than Rs 10 lakhs.
  • Parametric based insurances can be of great benefit to insurers and policyholders as they provide coverage to the needy at the event of catastrophic events, but at the same time they offer a predictable loss amount as the claim settlement is not based on indemnity. It will reduce the burden on the government in the event of national or regional catastrophic events.

“The loss of revenue from GST is a relatively much lesser burden on the government in relation to the responsibility of providing health care to the Above Poverty Line population and will ensure an overall increase in insurance adoption in India,” said Prusty.

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