As India prepares its economic blueprint for the next fiscal year, the insurance industry stands out as a critical component for securing household finances and managing risk. While regulatory measures have spurred growth, key metrics reveal that a vast portion of the population still lacks adequate financial protection.
Bridging the Persistent Insurance Gap
Data from the Insurance Regulatory and Development Authority of India (IRDAI) highlights a significant challenge. India's overall insurance penetration was merely 3.7% of GDP in FY24, with life insurance at 2.8%. This figure remains substantially lower than the global average, which exceeds 7%. A PwC India report on insurance inclusion sheds further light, indicating that in rural India—home to approximately 65% of the population—less than 10% of people have life insurance coverage. These statistics underscore the urgent need to expand access to financial safety nets across the nation.
Key Recommendations for the Upcoming Budget
The forthcoming Union Budget presents a pivotal opportunity to introduce policy measures that can transform the insurance landscape. Industry leaders have proposed specific reforms aimed at improving customer outcomes, encouraging long-term savings, and supporting national financial inclusion goals.
1. Creating a Level Playing Field for Retirement Products
India continues to grapple with a massive pension coverage deficit. The Mercer-CFA Institute Global Pension Index 2025 ranks the country 45th out of 47 nations for pension adequacy, with formal pension coverage extending to less than a quarter of the workforce. A major hurdle is the inconsistent tax treatment of retirement instruments. Currently, payouts from life insurance annuity products are fully taxed, including the principal amount which was already taxed during the individual's earning years. In contrast, the National Pension System (NPS) offers additional deductions for both employee and employer contributions.
This discrepancy often skews consumer choice toward tax benefits rather than product suitability. Experts recommend aligning the tax framework by taxing only the returns on annuity payouts and extending comparable deduction benefits to insurance-based pension products. Such a move would empower individuals to select retirement plans based on genuine long-term needs, thereby fostering wider adoption of structured retirement planning.
2. Encouraging Long-Term Savings Through Tax Parity
The tax code currently treats high-value traditional insurance policies and Unit Linked Insurance Plans (ULIPs) differently, creating an imbalance. For traditional policies with an annual premium exceeding Rs. 5 lakh, the maturity proceeds are taxed as regular income. However, for ULIPs where the annual premium is above Rs. 2.5 lakh, the gains receive the more favorable long-term capital gains tax treatment.
This disparity makes traditional policies, which offer substantial life cover alongside disciplined savings, less attractive to high-net-worth individuals, business owners, and senior professionals. Harmonizing the tax treatment by applying capital gains benefits to high-value traditional policies would simplify the tax code, ensure consistency, and incentivize more people to combine protection with wealth creation.
3. Enhancing Rural Insurance Affordability via Stamp Duty Reform
Affordability is a critical barrier to insurance adoption in rural and social sectors. Even minor costs like stamp duty can impact the pricing of low-ticket policies, deterring potential buyers. A proposed solution is to exempt rural and social sector insurance policies from stamp duty, following the precedent set by the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY). This direct cost reduction would make insurance more accessible, supporting deeper market penetration and fulfilling social objectives.
The Path Forward for Financial Resilience
Life insurance is instrumental in building India's long-term financial resilience. Despite sectoral progress, the penetration and coverage gaps highlighted by the data are stark. Thoughtful policy interventions in the upcoming budget can catalyze the development of a more efficient, equitable, and inclusive insurance ecosystem. The ultimate goal is to transform financial security from a privilege for a few into a robust foundation for every Indian household.
(The analysis is based on recommendations by Tarun Chugh, Managing Director and CEO of Bajaj Life Insurance.)
