Will taxation on high-value insurance be positive?

NEW DELHI: According to experts, incentives are the primary factor in accelerating insurance uptake or penetration. They also said that the taxation has also played an important role in incentivizing health, life, and non-life outcomes. The announcement by Finance Minister Nirmala Sitharaman that a levy tax will be imposed on high-value insurance plans issued on or after April 1, 2023, has prompted some scepticism about the sector's growth.

Till now, these insurance policies were added to the tax-free basket of investments. However, the new rules will not be implied on unit-linked insurance plans (ULIPs). Krishnan Ramachandran, MD & CEO, Niva Bupa Health Insurance shared his thoughts on this with ET Now.

I feel that the industry needs more encouragement from a policy and incentive standpoint. And I do recognize that there are not that many Indians who are at or above an income bracket that could afford to pay 5 lakhs annual insurance premium. All measures to support insurance awareness and penetration, whether it's tax or non-tax incentives, are much needed. In terms of the new taxation policy on high-value insurance, this measure will have a negative impact on insurance penetration. I do welcome the shift towards a simpler tax structure, I think Applied to Deductible ( ATD ), has been an important driver for health insurance penetration. I feel that could also get impacted by some of the changes made in the budget.

Tax evasion , I personally feel is not the right description of this. Whatever people are doing are taking advantage of things as per law. It could be deemed as a tax avoidance vehicle, but not an evasion vehicle. So, under the new tax regime, there are no deductions for life and health insurance. The government has the right intentions over here. But we also know that Indians buy insurance policies for getting tax benefits and there is no real awareness of making the right choices.

India is a fairly nascent market for insurance. And I just want to point out, that insurance is a financial tool for which awareness is still developing in our country. So many Western economies have moved here, which means that policy is assisting people in making the right choices, but they may not always be in the best position to determine how much they need to save for themselves when they reach 65, given their longevity and inflation.

So much thought has gone around, and insurance very much falls into the category of being right for the individual, but individuals do not always exercise those choices. And there's a whole economic system that encourages people, not just people, to make the right decision. One such incentive is taxation. And, from a behavioral economic standpoint, we all know that purchasing health insurance is the right thing to do because hospitalization can cause people to fall into poverty. And for example, in our own country, 60 million people become poor every year because of hospitalization expense. Now, is it an open year to buy health insurance? The answer is yes, but predominantly young people, people across ages, necessarily see that when they post continuously postpone this purchase. So that's where policy, that's where behavioral economics, that's where incentives come in to encourage people to do things that are right for them, but which they may not feel is right for them at that particular point in time. So I personally think that look, tax incentives, given where we are in terms of awareness and penetration, have a very, very important role to play in increasing health insurance or any insurance penetration in our country today.

Source: ET Now