Budget 2026 Outlook: Insurers, lenders seek tax parity, regulatory clarity and deeper financial inclusion push

The insurance industry’s foremost demand relates to the tax treatment of annuities and pension products

• Industry calls for Budget 2026 reforms in insurance, MSME credit, digital lending
• Demands: tax parity, climate-risk insurance, unified data exchange
• Budget expected to focus on rural support, infrastructure, and fiscal discipline

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As the Union Budget 2026 approaches on February 1, India’s financial services ecosystem, spanning insurers, brokers, NBFCs and digital lenders, is converging around a common theme — the need for structural reforms that improve affordability, access and long-term financial security.

From tax parity in retirement products and climate-risk insurance to MSME credit access and responsible digital lending, industry stakeholders are urging the government to use Budget 2026 to address systemic gaps that continue to limit penetration across insurance and credit markets.

Tax parity and retirement security

The insurance industry’s foremost demand relates to the tax treatment of annuities and pension products. According to a recent Deloitte report on Budget 2026 expectations, annuity payouts from insurance products are currently taxed on the entire amount, including the principal that has already been taxed during the accumulation phase.

This contrasts sharply with the National Pension System (NPS), where subscribers enjoy additional tax deductions on both self and employer contributions. Industry executives argue that this disparity distorts retirement planning, nudging savers toward tax-efficient instruments rather than products aligned with long-term income security.

A more harmonised framework, such as taxing only the returns portion of annuity payouts and extending comparable deductions to insurance-based pension products, could encourage structured retirement planning and strengthen India’s pension ecosystem, they say.

Climate risk and parametric insurance

Climate risk has emerged as another key focus area. With India facing rising losses from floods, heatwaves and extreme weather events, traditional indemnity-based insurance models are under increasing strain, while penetration of disaster and climate insurance remains low.

Deloitte has flagged parametric insurance as a scalable solution, particularly for farmers, coastal communities, MSMEs and infrastructure assets. These products enable faster, data-triggered payouts based on predefined parameters rather than loss assessments.

The firm has called for government co-funding, public–private risk pools and better access to climate data to help scale resilience-focused insurance products and reduce the fiscal burden of post-disaster relief.

AI, telematics and data infrastructure

As insurers increasingly adopt telematics in motor insurance, AI-led underwriting and health data integration through platforms such as the National Health Claims Exchange (NHCX), data fragmentation continues to constrain efficiency and fraud detection.

Industry participants are seeking the creation of a unified insurance data exchange, potentially built on existing institutions such as the Insurance Information Bureau (IIB). Such a framework, anchored in robust consent and privacy safeguards, could lower loss ratios, enable personalised pricing and improve trust in insurance systems.

Composite licensing and regulatory clarity

Composite licensing remains a long-pending reform on the insurance industry’s wish list. While the government announced 100 percent FDI in insurance in the previous Budget as part of the broader Insurance Amendment Bill, other key provisions, including composite licences allowing insurers to offer both life and non-life products, have yet to be implemented.

“Composite licensing is fundamentally about efficiency and customer experience,” said Naveen Chandra Jha, MD & CEO, SBI General Insurance. “It allows insurers to design solutions around life events rather than product silos, while also lowering structural costs.”

Insurers and brokers now expect Budget 2026 to offer clearer signals on the reform roadmap.

Micro-insurance and protection gap

A sharper policy push for micro-insurance is another shared expectation. Insurers and brokers are seeking lower transaction costs, exemptions on policy-level charges such as stamp duty for rural and social sector policies, and simplified product and distribution norms.

Micro-insurance such as low-premium products offering basic life, health and accident cover remains commercially challenging at scale despite its role in serving informal workers, daily wage earners and small farmers. Industry executives argue that even modest cost relief could materially improve uptake and help narrow India’s protection gap.

India’s overall insurance penetration remains at around 3.7 percent of GDP, well below global benchmarks. Life insurance penetration has slipped to 2.7 percent, while general insurance penetration has stagnated at about 1 percent, according to IRDAI data.

“India’s insurance challenge is not demand alone, but affordability, trust and access,” said Tarun Chugh, MD & CEO, Bajaj Life Insurance. “Budget 2026 has an opportunity to shift insurance from a discretionary product to a foundational element of household security.”

Brokers flag GST, digital and regulatory issues

Insurance brokers, meanwhile, are seeking clarity on input tax credit (ITC) treatment for distribution and digital services following GST changes, arguing that unresolved tax costs ultimately get embedded into premiums.

They are also looking for regulatory simplification, faster progress on composite licensing, budgetary support for rural insurance coverage and digital infrastructure, and clarity on the proposed healthcare regulator framework.

NBFCs and MSME lenders seek parity and refinance support

Beyond insurance, NBFCs and alternative lenders are urging the government to centre rural and semi-urban MSMEs and first-time borrowers in its financial inclusion agenda.

Deepak Aggarwal, Co-founder, Co-CEO and CFO of Moneyboxx Finance, said NBFCs have become the primary conduit of formal credit in underserved markets, supporting agri-allied businesses, services and small manufacturing units.

He called for a structured refinance mechanism for MSMEs and priority-sector lending, regulatory and tax parity with banks, and policy clarity on recovery mechanisms to sustain lending momentum without increasing borrower stress.

Credit gap, green finance and digital lending safeguards

Industry participants also highlighted India’s widening MSME credit gap, estimated at over Rs 20 lakh crore, despite the sector contributing nearly 30 percent of GDP and 45 percent of exports.

Neha Juneja, Founding Member of IndiaP2P and EquiRize, said Budget 2026 should focus on improving MSME credit access while accelerating investments in the green economy, including renewables, green mobility and clean cooking, which together represent over $50 billion in annual investment potential.

Digital lending players, meanwhile, expect clearer regulations to enhance transparency, responsible pricing and data-driven underwriting. Mukesh Pandey, Director at Rupyaa Paisa, said consumers are increasingly demanding fair pricing, better disclosure and innovative credit assessment models rather than just faster loan disbursals.

Industry executives argue that incentives for data-led underwriting, combined with greater awareness of credit scores and borrowing behaviour, could enable lenders to responsibly serve first-time borrowers while improving financial literacy across Bharat.

Growth and demand outlook

According to strategy expectations outlined in a report by ICICI Securities, India’s growth trajectory in FY26 has remained resilient but uneven, with urban consumption holding up better than rural demand, and private investment still cautious outside select sectors.

While government-led capital expenditure has remained a key growth anchor over the past few years, strategists believe incremental gains from public capex alone may moderate unless accompanied by stronger private sector participation.

Budget 2026 is therefore expected to include measures aimed at reviving household consumption, particularly in rural and semi-urban regions, through targeted income support, employment-linked schemes and lower compliance friction for small businesses.

Capital expenditure and infrastructure push

The government’s sustained focus on infrastructure is likely to continue, though at a more calibrated pace compared to the sharp step-ups seen in earlier budgets.

Strategists expect allocations to remain skewed towards transport, logistics, renewable energy, urban infrastructure and digital public infrastructure, which have the highest multiplier effects on employment and productivity.

Rather than a sharp jump in headline capex numbers, Budget 2026 is expected to focus on execution efficiency, timely disbursements and leveraging public spending to crowd in private and foreign investment.

Private investment and MSMEs

Private capex revival remains a key missing link in India’s growth cycle. While corporate balance sheets have strengthened, investment appetite has been restrained by global uncertainty, pricing pressures and uneven demand visibility.

Market participants expect Budget 2026 to address this gap through a mix of policy clarity, tax rationalisation and credit support for MSMEs, which form the backbone of employment and exports.

Simplified compliance norms, faster approvals and improved access to long-term credit are seen as critical to unlocking investment across manufacturing, services and export-oriented sectors.

Fiscal discipline and consolidation

Despite growth-focused expectations, strategists do not foresee any significant deviation from the government’s medium-term fiscal consolidation path.

Budget 2026 is expected to reinforce the commitment to reducing the fiscal deficit gradually, supported by steady tax buoyancy, rationalisation of subsidies and better targeting of welfare spending through digital platforms.

Rather than aggressive fiscal expansion, the emphasis is likely to be on improving the composition of expenditure, prioritising productive assets over revenue-heavy schemes.