Why Nirmala Sitharaman Needs to Increase Section 80D Deduction in the Union Budget 2025-26

One sector advocating for substantial reform is the insurance industry, which seeks measures to improve the affordability and accessibility of health insurance.

While healthcare costs are soaring all over the world, India, in particular, is grappling with a staggering medical inflation rate that touched 14% in 2024, the highest in Asia. This rate has significantly outpaced the country's Consumer Price Index (CPI) inflation, which is at 5.48% as of November 2024.

Disturbingly, despite rising healthcare costs, India does not have adequate social security for health. In FY24, the government health expenditure accounted for just 1.9% of the GDP.

Alarmingly, 62% of hospital expenses in the country are paid out of pocket, placing immense financial strain on many households that already struggle to access even basic healthcare.

Health insurance, in theory, should alleviate this burden. But ironically, even when one opts for health insurance coverage, an 18% GST is applied on the premium paid only compounds the burden of society. This is distressing and impeding the growth of the health insurance industry as well.

While exempting GST on health insurance coverage up to Rs 5 lakh and reducing the GST rate to 5% in case health insurance coverage is above Rs 5 lakh is widely discussed in the GST Council, there is no decision taken so far in this regard keeping the common man in the lurch.

A high GST rate and no increase in Section 80D deduction limit in the last 9+ years, has also got into the way of the growth of the health insurance sector in India.

Health insurance penetration in India is low: only 3.7% as a percentage of GDP in 2023-24, as per the Insurance Regulatory and Development Authority's (IRDA's) latest report. Moreover, there has been a decline since the previous year when the insurance penetration was 4.0% and had peaked during the COVID-19 pandemic. India's insurance penetration is significantly lower than the global average of 7%, leaving a large segment of the population vulnerable to rising healthcare expenses.

After the COVID-19 pandemic, there has been a noticeable rise in health insurance premiums making it difficult for individuals to cope with. As a result, many policyholders are hesitant to enhance their health insurance coverage even if they wish to.

Given these challenges, an increase in the deduction limit under Section 80D of the Income Tax Act, 1961, for health insurance premiums is the need of the hour, as well as exempting health insurance premiums for policies from GST.

Current Deduction Limit Under Section 80D of the Income Tax Act

As you may know, Section 80D of the Income Tax Act provides deductions for health insurance premiums paid for self, spouse, dependent children, and dependent parents. Members of a Hindu Undivided Family (HUF) are also eligible to claim this deduction.

However, the amount of deduction varies depending on the age of the insured individuals.

Currently, for resident non-senior citizens (individuals below 60 years of age), the deduction allowed under Section 80D is up to Rs 25,000 in a financial year in which the health insurance premium is paid.

For senior citizens (aged 60 years or above), the deduction limit is higher i.e. up to Rs 50,000 for premiums paid for themselves.

At present, here are some combined deduction scenarios...

• Non-Senior Citizens Paying for Self and Family - A non-senior citizen can claim up to Rs 25,000 for self and an additional Rs 25,000 for other non-senior family members, totalling Rs 50,000 in a financial year.

• Non-Senior Citizens Paying for Senior Citizen Parents - If a non-senior citizen pays premiums for self and family members, including senior citizen parents, the maximum deduction allowed is Rs 75,000 (Rs 25,000 for self + Rs 50,000 for senior citizen parents) in a financial year.

• Senior Citizens Paying for Self and Senior Citizen Parents - In this case, the maximum deduction increases to Rs 1,00,000 (Rs 50,000 for own policy + Rs 50,000 for parents' policy) in a financial year.

An individual can also claim up to Rs 5,000 for expenses related to preventive health checkups for self, spouse, dependent children, and parents. But keep in mind that, this amount is not a separate deduction and is included within the overall limits of Section 80D deduction.

For contributions made to the Central Government Health Scheme (CGHS) or any other notified scheme, a deduction of up to Rs 25,000 is allowed for the individual and their family members. However, contributions made for parents are not eligible in this case, and the deduction falls within the overall Section 80D limit.

For HUFs, if all members are below 60 years of age, the maximum deduction allowed is Rs 25,000. But if any member of the HUF is a senior citizen, the deduction increases to Rs 50,000. Note, that HUFs are not allowed to claim deductions for preventive health checkups.

Expectations from the Union Budget 2025-26

The deduction limits under Section 80D were last revised in the Union Budget 2015, where they were increased from Rs 15,000 to the current Rs 25,000 for non-senior citizens and Rs 50,000 for senior citizens.

Thereafter, although healthcare costs went up, the government hasn't bothered to increase this deduction limit. The present Section 80D deduction limits are now woefully insufficient considering the lack of adequate social security for health in India.

Therefore, a reassessment in this regard by the present Modi 3.0 coalition government is imperative.

Here's what is expected...

• The Section 80D deduction limit for health insurance premiums paid by individuals and HUFs below 60 years of age be doubled to Rs 50,000 from the current Rs 25,000.

• For individuals below 60 years who also pay premiums for their non-senior citizen parents, the deduction should be increased to Rs 75,000 from the current Rs 50,000.

• Senior citizens, who often bear the brunt of rising premiums due to their age, should be allowed a deduction of up to Rs 1 lakh instead of the current Rs 50,000.

Additionally, extending enhanced deduction limits to taxpayers opting for the new tax regime would further encourage health insurance adoption and increase its penetration across the population.

Another pressing concern is the 18% GST on health insurance premiums, which significantly adds to the financial burden on policyholders. A reduction in GST to 5% for health insurance of up to Rs 5 lakh, or ideally its complete removal, would help reduce the burden of the common man and, in turn, enable increasing the penetration of health insurance in the country.

Strengthening Healthcare Infrastructure Through PPPs

Beyond tax reforms, the government needs to focus on improving healthcare infrastructure through meaningful Public-Private Partnerships (PPPs).

Essentially, a PPP allows the public sector (governments and governmental entities) to collaborate with private entities (companies, cooperatives, charities, and NGOs) to deliver infrastructure and services. This includes areas like healthcare, education, and transportation.

A well-structured PPP model combines the experience, knowledge, and financial resources of both sectors to deliver better quality services.

In the context of healthcare, if PPPs are implemented effectively, insurance companies may be able to provide higher quality and more diverse services at lower costs.

PPPs could enable better monitoring of service quality in the private sector, ensuring citizens have access to improved healthcare. Such partnerships could enhance insurance coverage, accessibility, and citizens' satisfaction, ultimately improving the overall health infrastructure in the country.

To Conclude...

As the Union Budget 2025-26 approaches, we hope that the Modi 3.0 coalition government and finance minister Ms Nirmala Sitharaman is hearing us out and prioritises the much-needed reforms in the healthcare sector and the health insurance segment.

Increasing the deduction limit under Section 80D and reducing GST on insurance premiums would not only provide financial relief but also encourage more people to purchase health insurance considering the tax benefits.

In this day and age, having a comprehensive health insurance policy with an adequate sum insured is crucial to enhancing peace of mind and financial security.

The coverage amount should be carefully chosen, factoring in your family's medical history, any pre-existing conditions, the number of dependents, the region you live in, the network of hospitals available, and the rising healthcare costs.

Opting for a cashless health insurance policy can further alleviate financial stress during medical emergencies, as it eliminates the immediate burden of arranging funds for hospitalisation and treatment.

Be thoughtful in your approach.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.