The insurance industry in India is on the cusp of transformative growth, driven by rising awareness of financial security and the urgent need for robust risk management solutions. As Budget 2025 approaches, the sector has high hopes for reforms that could enhance financial inclusion, address affordability challenges, and bring Indian insurance practices in line with global standards. Here are the key expectations of the insurance industry from this year’s Union Budget:

1. Separate Tax Exemption for Term Insurance

Term insurance plays a critical role in financial planning by providing affordable life coverage. However, the lack of a dedicated tax exemption for term insurance premiums often discourages adequate coverage.
Introducing a separate tax category for term insurance premiums would incentivize individuals to prioritize their family’s financial security. According to Sanjiv Bajaj, Jt. Chairman & MD, BajajCapital, such a reform could narrow India’s significant protection gap and ensure more households are protected against unforeseen events.

2. Reducing GST on Insurance Products

The current 18% Goods and Services Tax (GST) on insurance premiums remains a significant barrier for low-income groups. The high cost of premiums, compounded by GST, makes insurance unaffordable for many. A reduction in GST rates could make insurance more accessible and boost penetration in underinsured segments, fostering financial inclusion on a national scale.

3. Enhanced Tax Deductions for Health Insurance

In the face of rising medical costs, health insurance is no longer a luxury but a necessity. Increasing the deduction limit under Section 80D of the Income Tax Act to ₹50,000 for individuals and ₹1,00,000 for senior citizens could provide much-needed relief to policyholders.
Additionally, introducing tax exemptions for contributions to Health Savings Accounts (HSAs) would help individuals manage escalating healthcare costs, ensuring access to quality medical care without undue financial strain.

4. Modernizing Rule 6E for Unexpired Premium Reserves

Rule 6E of the Income Tax Act, which permits only 50% of unexpired premium reserves for calculation, is outdated and misaligned with global best practices. The shift to the 1/365 method, already approved by the Insurance Regulatory and Development Authority of India (IRDAI), would enhance risk management practices and align India’s insurance sector with international standards.

5. Exempting Annuity Income from Taxation

Annuity products are vital for retirement planning, but the current tax structure discourages adoption by taxing both annuity income and the principal. Exempting annuity income from taxation would encourage more individuals to invest in retirement-focused products, promoting financial security during post-retirement years and reducing dependence on social welfare systems.

6. Tackling Medical Inflation Through Pricing Consistency

The rapid rise in hospitalization costs—up by 15% over the past three years—has intensified the burden on insurers and policyholders. Current regulations allow insurers to adjust product pricing only once every three years, a timeframe that fails to keep pace with inflation. Establishing pricing consistency at the hospital level, potentially through government intervention or a dedicated health regulator, could mitigate the impact of medical inflation and ensure sustainable health insurance offerings.

7. Fostering Growth Through Investments and Innovation

India’s insurance sector has already attracted $6.5 billion in investments over the past nine years, underscoring its growth potential. To maintain this momentum, rationalizing GST rates and introducing tax incentives for innovation are essential. These steps could draw further investments and stimulate the development of innovative products tailored to India’s diverse demographic needs.

8. Establishing a Dedicated Health Regulator

The creation of a health regulator remains a long-standing demand of the insurance industry. A dedicated regulator could oversee pricing mechanisms, standardize hospital costs, and ensure fair pricing of health insurance products. This would enhance the affordability and sustainability of health insurance, making it accessible to a broader population.

9. Promoting Insurance Awareness and Adoption

Tax incentives have historically played a significant role in increasing insurance adoption. Simplifying processes, reducing costs, and launching government-led awareness campaigns could encourage more individuals to secure their financial future. By bridging the knowledge gap, such initiatives would help Indians understand the importance of insurance in financial planning.

By implementing reforms such as dedicated tax exemptions for term insurance, reduced GST rates, enhanced tax deductions for health insurance, and modernized regulatory frameworks, the government can boost financial inclusion, affordability, and innovation within the sector.

“These measures would not only benefit policyholders but also contribute to the overall growth and stability of the Indian economy,” said Sanjiv Bajaj. As the insurance sector evolves, proactive policy interventions will be critical in ensuring that it continues to serve as a cornerstone of financial security for millions of Indians.