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As India prepares to chart its economic priorities for the coming year, the insurance sector is emerging as a critical pillar of financial stability, long-term savings, and risk protection for households. With Budget 2026 around the corner, industry experts believe this is a crucial opportunity for the government to strengthen insurance penetration, rationalise tax structures for retirement products, and accelerate financial inclusion—especially in underserved rural areas.

While recent regulatory reforms and policy initiatives have supported steady growth in the insurance industry, data suggests that India still has a long way to go in ensuring adequate financial protection for its population.

Insurance Penetration Remains Below Global Levels

According to the latest annual report of the Insurance Regulatory and Development Authority of India, India’s total insurance penetration stood at 3.7% of GDP in FY24, with life insurance contributing 2.8%. This is significantly lower than the global average of over 7%, highlighting the scale of the protection gap.

A separate insurance inclusion report by PwC India points to an even more pressing challenge in rural regions. Nearly 65% of India’s population lives in rural areas, yet less than 10% of people in these regions have life insurance coverage. Despite progress, access to financial security remains limited for a large section of society.

Budget 2026: A Key Opportunity for Policy Support

The upcoming Union Budget offers a vital opportunity to address these gaps through targeted policy measures. Experts argue that reforms should focus on three core objectives:

• Encouraging long-term savings

• Improving retirement readiness

• Expanding insurance coverage among low-income and informal workers

One of the most critical areas needing attention is India’s retirement ecosystem.

Retirement Coverage: A Major Structural Gap

India’s formal pension coverage remains worryingly low. Although the National Pension System (NPS) and other structured pension schemes have expanded over time, coverage is still limited.

As per the Mercer CFA Institute Global Pension Index 2025, India’s formal pension coverage accounts for less than 25% of the total workforce. In terms of pension adequacy, India was ranked 45th out of 47 countries, underlining the urgency of reform.

Both life insurance annuity products and the National Pension System aim to provide retirement income security. However, a major imbalance exists in how these products are taxed.

Unequal Tax Treatment Distorts Investor Choices

Currently, annuity payments from insurance products are fully taxable, including the portion representing the original investment amount that may have already been taxed during the accumulation phase. In contrast, NPS subscribers enjoy additional tax deductions on both employee and employer contributions.

This disparity often influences customer decisions more on tax efficiency than on product suitability. Experts believe that a more balanced tax framework—such as taxing only the return component of annuity payouts and allowing comparable deductions for insurance-based pension products—would help individuals make choices aligned with their long-term retirement needs rather than short-term tax savings.

Rethinking Tax Rules for Traditional Insurance Policies

Over the past few years, high-premium traditional insurance policies have also faced less favourable tax treatment. For policies with annual premiums exceeding ₹5 lakh, maturity proceeds are now taxed at applicable income tax slab rates.

These policies, which combine disciplined savings with comprehensive life cover, have become less attractive compared to other investment options. Meanwhile, high-value Unit Linked Insurance Policies (ULIPs) with total annual premiums above ₹2.5 lakh benefit from long-term capital gains tax treatment, which is often more tax-efficient.

Bringing parity by applying similar capital gains taxation to high-premium traditional insurance policies could simplify the tax code, ensure consistency, and encourage higher-income groups—such as entrepreneurs, dual-income households, and senior professionals—to save through insurance-backed instruments.

Micro Insurance: The Missing Link in Financial Inclusion

Another key expectation from Budget 2026 is a stronger push for micro insurance. Affordable, low-ticket insurance products can play a transformative role in protecting vulnerable households from health emergencies, income loss, and natural disasters—particularly in rural and semi-urban India.

Targeted incentives, simplified product structures, and digital distribution support could significantly expand micro insurance adoption and align with the government’s broader financial inclusion goals.

The Road Ahead

Overall, Budget 2026 has the potential to reshape India’s insurance and retirement landscape. Equalising tax treatment across retirement products, simplifying insurance taxation, and promoting micro insurance can collectively drive higher participation, improve long-term financial resilience, and support inclusive economic growth.

For policymakers, the message from industry experts is clear: the focus should shift from fragmented incentives to a cohesive framework that encourages Indians to plan, protect, and save for the future with confidence.

Disclaimer: This article is for informational purposes only and reflects industry views and expectations. Readers should consult certified financial advisors before making any investment or insurance-related decisions.