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Impact of Union Budget 2020 on Insurance Sector

Mar 20, 2020 | 2 months ago | Read Time: 3 minutes | By iKnowledge Team
Impact of Union Budget 2020 on Insurance Sector

India’s insurance penetration rate, referred to as the ratio of total amount of insurance premiums to GDP, stood at 3.7% in 2018. The low insurance penetration rate still leaves a lot to be desired. The insurance industry held high expectations of Budget 2020 for measures, initiatives and incentives to help boost the sector and take this rate to a record high. 

How did the Union Budget deliver on these expectations?

Finance Minister, Nirmala Sitharaman, who delivered her second Union Budget on February 1st, did make some key announcements that will likely have an impact on the insurance sector in a number of ways.

Union budget 2020 brought forth a string of measures, ranging from a new optional tax regime to increase consumers’ purchasing power to underscoring the importance of social security by redirecting more funds towards government-sponsored insurance schemes.

Let us understand the impact of budget 2020 in detail, specifically on the insurance sector and what it holds for the future:

1. Upcoming initial public offering of Life Insurance Corporation (LIC): The Government proposes to sell a part of its share in the country’s largest insurer, LIC in FY 20-21. The company currently holds a market share of close to 76% in the insurance sector. The initial public offer (IPO) announced in Union budget 2020 would involve listing the company on the stock exchange and unlocking its value by allowing retail investors to participate. It is estimated that the government plans to collect ₹70,000 crores by selling a part of its stake in the company. The sale will help the government to meet its ambitious disinvestment target of ₹2.1 lakh crore for the next fiscal year. It will also bring in more transparency, increased accountability in the life insurance sector and make its workings more efficient. 

2. Expansion of Ayushman Bharat scheme: ₹69,000 crores were earmarked for the health sector in the Union budget 2020 to be focused on expanding Pradhan Mantri Ayushman Bharat Scheme. The funding will be utilised to establish hospitals in Tier II and Tier III cities in India under the public-private partnership model to facilitate the reach of quality healthcare to the masses. A part of this would be funded from the amount recovered as taxes on medical devices, as suggested by the Finance Minister. Ayushman Bharat currently provides a yearly cover of ₹5 lakh to 100 million families across India, covering 40% of the population. Such government-sponsored schemes are critical in enhancing insurance penetration and bringing coverage to the last mile by spreading awareness, winning the trust of people and making them financially literate.

3.  Simplified tax regime: One of the most important impacts of budget 2020 has been the introduction of a new tax regime. This tax regime offers lower rates and new income tax slabs for taxpayers.

FY 2020-21 Income Tax slabs per the new tax regime announced in Budget 2020

Total income (in Rs.) Tax rates under new regime
Up to Rs. 5,00,000 No Tax
Rs. 2,50,001 to Rs. 5,00,000 No Tax
Rs. 5,00,001 to Rs. 7,50,000 10%
Rs. 7,50,001 to Rs. 10,00,000 15%
Rs. 10,00,001 to Rs. 12,50,000 20%
Rs. 12,50,001 to Rs. 15,00,000 25%
Rs. 15,00,001 and above 30%

While this tax regime does come with revised rates, it also does away with a number of tax exemptions and deductions. In the new regime, tax benefits cannot be claimed under Section 80C or 80D, two of the most popular sections offering incentives for insurance policyholders. The incentive of tax saving is key to taxpayers making investments in insurance-related products.

However, the new tax regime has been made optional to taxpayers. A taxpayer can still choose to avail of deductions and file taxes as per the previous system. This spells good news for the insurance sector, since tax-benefit hungry investors will still be able to purchase insurance policies and make the most of the deductions and exemptions offered.

Conclusion

With the tax-filing season right around the corner, if you’re looking to file taxes under the old taxation regime, you can consider purchasing the term insurance and life insurance plans from Aegon Life, and avail of deductions on the premiums paid.


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