How Enhanced 80C And 80D Caps Can Increase Insurance Penetration In India

To drive greater penetration in metro cities and non-metros, insurance policy purchases should be sweetened via tax-saving options

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In India, insurance penetration rates are below par, unlike developed nations. Given this situation, the Centre’s proposal to hike the FDI limit from 49 per cent to 74 per cent in the Union Budget 2021-22 is welcome.


At the corporate level, another essential policy reform concerns the current 18 per cent GST rate. If insurance penetration rates are to rise in India, this should be revised to 12per cent or lower. High hopes were entertained that some of these measures would be announced in the recent Union Budget, which didn’t happen. However, the Centre can always implement policy reforms at any stage of the year.

Corporate hurdles apart, a major one lies in the retail segment: the mindset of many people that insurance is not necessary for them. Here, the COVID-19 pandemic came out of the blue as a wakeup call for the young and not-so-young that health events, emergencies and epidemics can’t be predicted. This is all the more reason to buy health insurance and term life policies before an event hits.

While tailwinds from the coronavirus outbreak boosted health insurance, institutional reforms are required to nudge various sections, including millennials, to appreciate the importance of insurance. These reforms relate to tax-savings benefits through income tax laws.

Consider Section 80C. The IT Act allows a tax deduction of up to INR 150,000 on diverse investments. These include PPF, NPS, NSC, ELSS, principal paid on home loan and insurance policies, among others. Given the string of investment options, Sec 80C is crowded and offers tax-saving avenues that are too low. To ensure tax-savings attraction on insurance policies, the deduction cap could be considerably hiked. Alternatively, insurance policies should have a separate section allowing tax deduction.

Then take Section 80D. Here again, the limit remains low. While last year’s Budget enhanced Sec 80D’s limit to INR 50,000, it had a catch. The higher limit was only for senior citizens! Though the latest Budget overlooked this, extending the enhanced limit for other taxpayers can be done at any time later this year.

Meanwhile, the pandemic has driven greater awareness among consumers about insurance policies, particularly term plans and health insurance. But this is only part of the penetration challenge. The other relates to ensuring that awareness triggers positive action via the purchase of relevant health insurance and term plans, besides others. Whereas the former is beneficial in meeting unexpected or emergency expenses on hospitalization and healthcare, the latter is crucial during any unforeseen eventuality concerning a family’s breadwinner.

Coming to term insurance, various companies, especially startups, offer these plans online. What’s more, insurance can be bought online swiftly and safely while customising plans as per personal needs.

The other issue relates to annuities from insurance firms. If a pension plan is purchased from an insurance company, the policyholder is levied tax on the annuity. These products will attract more customers if annuities are tax-free. Since NPS (National Pension Scheme) is permitted an extra tax exemption cap of INR 50,000 above the INR 150,000 under Sec 80C, allowing this for annuities will create a level playing field.

In recent years, preventive medical check-ups as well as curative care in hospitals have seen escalating costs. Therefore, the current health premium limits should be increased. Simultaneously, awareness must be created in non-metro cities too about the importance of having health insurance to safeguard one’s financial future. Generally, people in tier II cities and beyond keep ignoring health insurance. But COVID-19 has transformed legacy thinking.

Once the significance of health insurance and term plans in financial risk management for individuals and their families becomes clear, insurance penetration rates will increase sooner rather than later.