Budget 2025: Will major reforms boost India's insurance sector?

India has one of the largest insurance markets in the world, and it’s rapidly evolving. However, the insurance sector has been facing challenges such as low penetration, profitability issues, and a coverage gap.

As Finance Minister Nirmala Sitharaman is set to present her record eighth consecutive Budget on February 1, the insurance sector will look for positive triggers. The Union Budget 2025 falls on Saturday, February 1, and stock markets have announced that they will remain open as per regular market timings for the historic day.

The insurance industry players have been seeking policy measures that would improve customer affordability, steps to increase penetration, and lowering the Goods and Services Tax (GST) on certain products to aid growth. The insurance sector experts have recommended several measures, such as tax benefits, easing of the regulatory framework, and friendly policy guidelines to attract foreign investment, among others.

Expanding tax benefits

The insurance industry expects tax incentives to encourage the buying of more insurance products. Currently, life insurance premiums qualify for deductions under Section 80C of the Income Tax Act, 1961, under the overall limit of ₹1.5 lakh per annum. On the other hand, general insurance, including health and term insurance, premium payments don’t qualify for similar benefits. Expanding tax deductions to include health and term insurance would make coverage more accessible, especially for middle-class households. Given the rise in health insurance demand post-COVID-19, an improved tax relief structure could accelerate insurance penetration, according to experts.

Lowering GST

The industry is looking forward to a reduction in the current 18% GST on life and health insurance premiums, which significantly raises consumers' costs. Lowering this tax rate could make insurance more affordable and drive higher adoption rates, particularly in underserved segments. A lower GST rate could be a game-changer, ensuring wider coverage without undue financial burden.

Simplifying regulations

Regulatory reforms are expected to focus on simplifying policy documentation, streamlining claims processes, and promoting digital adoption. The sector seeks policies that enhance transparency, reduce procedural delays, and make claim settlements more efficient through digital-first approaches. Experts suggest that a customer-centric regulatory framework would improve consumer trust, drive higher engagement, and reduce insurers' operational costs, benefiting both policyholders and industry players.

Increasing FDI limits

The government has progressively raised the FDI cap in insurance, from 26% to 49% in 2015 and 74% in 2021. The industry now seeks 100% FDI in the sector, which could attract global investors, bring fresh capital, and enhance market competitiveness. Higher FDI would strengthen insurers' financial positions, leading to improved policy offerings, better customer service, and a stronger insurance ecosystem. If announced in the Budget 2025, this could mark a major milestone for the insurance industry.

Composite licences

The sector is pushing for the introduction of composite licences, which would allow insurers to offer life, health, and general insurance under a single licence. This reform would simplify regulatory compliance, enhance operational efficiency, and encourage product innovation. Composite licences would reduce administrative complexities, helping insurers more effectively cater to diverse consumer needs and ensuring a more competitive and consumer-friendly insurance market.

Value-added services

To make insurance more appealing, insurers seek incentives for value-added services, such as health-monitoring devices, wellness programmes and rewards for timely premium payments. These initiatives could personalise insurance offerings, promote preventive healthcare and improve policyholder engagement.