The Union Budget 2023-24 Falls Short of Expectations for the Insurance Sector

Finance Minister Ms Nirmala Sitharaman presented the first Budget of 'Amrit Kaal' on February 01, 2023, which emphasised on pro-growth measures with a particular emphasis on improving infrastructure & investment and inclusive development.

However, the Union Budget 2023-24 fell short of expectations for the insurance sector, which was expected to witness some major changes to boost the life insurance and health insurance penetration in the country.

Maturity proceeds of life insurance policies with a premium over Rs 5 lakh will now be taxed

One of the significant drawbacks in the Budget is the taxation of the maturity proceedings from a life insurance policy. According to the new proposal, if a customer pays an annual premium of over Rs 5 lakhs for their traditional insurance policy, the income received upon maturity will be taxed, whereas it is currently tax-exempt.

While presenting the Union Budget 2023-24, Finance Minister Ms Nirmala Sitharaman said, "It is proposed to provide that where the aggregate of premium for life insurance policies (other than Unit-linked Insurance Plan) issued on or after April 01, 2023, is above Rs 5 lakh, income from only those policies with aggregate premium up to Rs 5 lakh shall be exempt".

She further stated that this change would not impact the tax exemption on death benefits from a life insurance policy and also not apply to insurance policies purchased before March 31, 2023.

So, if an individual has multiple life insurance policies issued after April 01, 2023, and the combined premium amount exceeds Rs 5 lakh, then the maturity proceeds will be subject to taxation.

The resentment was evident in the stock market as shares of insurance companies fell by as much as 10% after the announcement.

The unfavourable announcement will likely deter individuals from purchasing high-value traditional insurance policies. However, it will prove to be a positive outcome if the proposal leads to a boost in interest in term insurance, which provides coverage for pure risk.

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No increase in threshold under Section 80C

As the Union Budget 2023-24 announcement approached, middle-class salaried professionals were eager to hear about income tax and tax deduction changes in the Budget speech. However, this year's Bill has left most taxpayers disappointed.

The Government has proposed to raise the tax rebate limit to Rs 7 lakhs under the New Tax Regime, which is currently Rs 5 lakhs under the Old as well as New Tax Regime. The income tax slabs are also proposed to be adjusted in the new tax regime, reducing the number of slabs from six to five and increasing the tax exemption limit to Rs 3 lakhs. However, all the positive changes are proposed under the new tax regime, and there was no mention of the old tax regime.

The New Tax Regime eliminates several exemptions, such as deductions up to Rs 1.5 lakh under Section 80C, HRA, and LTA, that are available in the Old Tax Regime.

Section 80C of the Income Tax Act offers a tax deduction of up to Rs 1.5 lakhs for premium payments made on life insurance policies. This deduction applies to policies taken out by the taxpayer, their spouse, or children. While the Government has proposed to increase the tax rebate limit in the new tax regime, at least the tax deduction limit under Section 80C should have been increased in the old tax regime.

With the higher tax rebate limit under the new tax regime, more individuals will prefer this regime. The elimination of Section 80C will discourage individuals from buying tax-saving instruments like life insurance, which could negatively affect the penetration of life insurance.

No mention of Health Insurance:

India has one of the lowest rates of health insurance penetration in the world due to a lack of awareness, limited reach, and lack of education. Many people end up spending a significant portion of their income on healthcare. In order to boost health insurance penetration, enhance accessibility, and make it more affordable, the Government was expected to prioritise the health insurance sector in the Union Budget 2023-24 and take necessary measures.

Given the rising cost of healthcare & health insurance premiums and the threat posed by the emergence of new viruses, Finance Minister needed to consider raising the tax deduction limit under Section 80D of the Income Tax Act. The current tax deduction limit for health insurance premium payments is Rs 25,000 (Rs 50,000 for senior citizens), which is inadequate considering the growing cost of health insurance.

A higher tax deduction would mean more disposable income, which would have led to higher penetration of health insurance as people would have been encouraged to buy adequate health insurance coverage for all their family members.

Another factor that greatly impacts health insurance premiums is the high Goods and Services Tax (GST) rate of 18%. This high rate is a hindrance to increasing health insurance penetrations as it considerably pushes the premium amount up.

Increasing the tax deduction limit on health insurance and removing GST on health insurance are missed opportunities for the Government to increase the penetration of health insurance and ensure that citizens are not uninsured or underinsured.

Final words:

The Union Budget 2023-24 has been seen as a significant setback for middle-class taxpayers, particularly with regard to necessities like life insurance and health insurance. Taxpayers have taken to social media to express their frustration, saying that Finance Minister has tweaked the income tax slabs to encourage taxpayers to move towards the new tax regime, and the Bill encourages 'spending' over 'saving'. India has low insurance penetration, and government efforts are required to increase it in the coming years through various measures and incentives.

Had the insurance sector been given more priority, such as by exempting insurance policies from GST and increasing tax deductions under Sections 80C and 80D of the Income Tax Act, it would have encouraged more people to buy the insurance and helped improve the insurance penetration in India, ultimately leading to a healthier and happier economy.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.