Mr. Yogesh Indap and Mr. Jaffar Maruf (Chartered Accountants) highlight the proposed reforms from the perspective of the insurance industry. The authors apprise that certain measures such as increase in foreign direct investment in the insurance sector, optimizing tax positions by providing Clarity on taxability of Income from Unit Linked Insurance Policy and providing tax certainty, would help streamlining the growth of the Insurance sector. The authors are of the view that, “Industry leaders are prepared to capitalize on the opportunities presented, positioning themselves to explore new business ventures and commercial prospects. This positive outlook signals a potential expansion of the sector, driven by the budget’s strategic measures aimed at fostering sustainable growth and enhanced market confidence”.

“Budget 2025 From the Lenses of Life Insurer”

“Vaanokki vaalum ulakellaam mannavan

koalnokki vaalung kuti”

The Finance Minister (FM) Smt. Nirmala Sitharaman delivered her eighth multi-language Budget on 1st February 2025. FM once again indicated India’s path towards good governance. The Budget has introduced reforms to boost economic growth, encourage investment, and simplify taxation. It aims to provide clarity for taxpayers, streamline tax administration, and reduce litigation, supporting the vision of a Viksit Bharat.

As India advances towards IRDAI’s vision of achieving "Insurance for All" by 2047, it is essential to thoroughly assess the present state of the Life Insurance (LI) sector and implement strategic measures to address existing challenges. Amid regulatory changes by IRDA, litigation on direct tax and GST front, the LI industry was expecting significant relief from the Budget. In this context, efforts have been made below to summaries the impact of recent Budget announcements on LI industry:

Clearing the Path for Investments:

Foreign Direct Investment (FDI) in the insurance sector has experienced a fluctuating trajectory, with periods of growth followed by notable challenges throughout its history. The FDI limit was increased from 26% in 1999 to 49% in 2015, and it was further raised to 74% in 2021. Current budget has further increased the FDI to 100%.

Allowing 100% FDI in the insurance sector may help tackle critical challenges, such as the solvency requirements faced by current insurers given the high growth trajectory of industry in last few years.

As of FY23[1], life insurance penetration in India was 3.0% of the nation's GDP, showing a consistent increase from 2.7% in FY16. This proposal is expected to drive further growth, surpassing the 3.0% mark.

Encouraging investments in insurance

• Exemption on life insurance policy from IFSC Insurance offices

To maintain equity for non-residents acquiring life insurance through insurance offices in the IFSC, in comparison to other foreign jurisdictions, it is proposed to modify section 10(10D) of the Income-tax Act, 1961. This modification will ensure that the proceeds from life insurance policies issued by an IFSC insurance intermediary are exempt from taxation, eliminating the condition related to the maximum premium payable on such policies as previously outlined.

Earlier amendment in section 10(10D) vide Finance Act 2021[2] and 2023[3] had placed restriction on life insurers to sell tax-free big-ticket insurance policies. As per IRDAI[4], the LI industry experienced a 10% growth in new business premiums, collecting Rs. 2.75 lakh crore in April-December 2024, up from Rs. 2.50 lakh crore in the same period in 2023. However, the number of policies sold declined by 2%, with 1.82 crore policies sold in the first nine months of FY 25, compared to 1.85 crore in the previous year. This proposal could help attracting new customers and boosting the LI sector.

• Deduction under section 80CCD for contributions made to NPS Vatsalya

The NPS Vatsalya Scheme, a child welfare program introduced on September 18, 2024, received a boost on the Budget Day when the FM proposed enhancing the tax incentives available for the National Pension Scheme (NPS) under section 80CCD(1B).

Parents or guardians making contributions to the NPS Vatsalya account will be permitted to claim a deduction up to the value of their contributions, with a cap of ₹50,000. It is important to note that this deduction is applicable solely within the old tax regime.

Optimizing Tax Position

• Clarity on taxability of Income from Unit Linked Insurance Policy

The Finance Act 2021 introduced an amendment for ULIPs issued after 1 February 2021, specifying that if the annual aggregate premium exceeds ₹ 2,50,000, the proceeds from ULIP shall be subject to tax. However, there was ambiguity on classification as income from other sources or capital gain of gain from ULIPs not breaching such threshold but not complying with 10X sum assured ratio.

In this regard, certain key clarification brought in by Budget are as follows:

• Nontax exempt ULIPs under section 10(10D) shall be considered as capital assets

• The profits and gains arising from nontax exempt ULIPs under section 10(10D) shall be subject to taxation as capital gains

• Nontax exempt ULIPs under section 10(10D) shall be classified as equity-oriented funds.

The clarification will bring certainty in the mind of ULIP investors who will be benefited by taxing gain from ULIPS at 12.5% as “Capital gain’ as against earlier 30% under “Income from Other sources”.

Section 194D – Insurance commission

FM has proposed a reduction in the TDS rate from 5% to 2%, along with an increase in the deduction threshold from Rs. 15,000 to Rs. 20,000 on Insurance commission under section 194D.

The government has effectively reduced immediate tax outflow and improved cash inflow in the hands of insurance agents, by providing relief on TDS rates. Such thoughtful reforms are sure to benefit agents and encourage the continued development of the insurance sector.

Expecting Tax Certainty

• LI industry tax litigations

Currently, LI industry is going though litigation on multiple tax issues. The Income Tax department has reignited age old, settled issues with LI companies. Taxability of negative reserves, surplus from shareholder’s fund as life insurance business income, eligibility of tax exemptions on pension[5], dividend[6] income, non-applicability of disallowance for expenses to earn exempt income are amongst such key tax issues. Similarly, ITC reversal for transaction in securities, GST rate for rider premium, are few key tax issues LI companies are facing under GST regime. Bringing clarifications on these ancient tax litigations in Budget could have brought more certainty in tax positions adopted by LI companies.

Concluding remarks

The LI industry has expressed strong optimism regarding the provisions highlighted in the budget. Industry leaders are prepared to capitalize on the opportunities presented, positioning themselves to explore new business ventures and commercial prospects. This positive outlook signals a potential expansion of the sector, driven by the budget’s strategic measures aimed at fostering sustainable growth and enhanced market confidence.

(The views expressed above are personal.)