Insurance industry pitches for tax sops in Budget 2026, deductions under new tax regime, ITC anomaly fix

Union Budget 2026

• Industry seeks higher tax deductions and ITC resolution in Budget 2026
• Calls to extend tax benefits to new tax regime for health and life insurance
• Resolving ITC anomaly could help contain insurance premium costs

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With Budget 2026 approaching, the insurance industry hopes for a hike in tax deductions, extension of tax benefits to the new tax regime for both health and life policies, and a resolution of the input tax credit (ITC) on GST.

The industry believes that these moves would encourage households to opt for adequate protection, ensure tax parity for annuity and pension products, and contain premiums if the ITC anomaly is resolved.

Currently, the old tax regime allows a deduction of up to Rs 25,000 for individuals and families below 60 years of age and Rs 50,000 for senior citizens under Section 80D of the Income Tax Act.

Subrata Mondal, Managing Director & CEO of IFFCO-TOKIO General Insurance, argues that these limits no longer reflect rising medical inflation. “Doubling the deduction would encourage households to opt for adequate protection rather than minimal coverage and support long-term financial security.”

Tax analysts, on the other hand, say that the deduction should also be extended to individuals opting for the new tax regime. “Extending deduction benefits to the new tax regime will ensure that the pursuit of a simpler tax code does not inadvertently discourage essential health coverage,” said Shravanth Shanker, Managing Partner, B. Shanker Advocates.

Extend deduction benefits on life insurance to new tax regime

The Income Tax Act provides tax benefits for life insurance premiums and proceeds received upon maturity or upon the insured's death. Section 80C allows a tax benefit of up to Rs 1.5 lakh on premiums, and a tax-free payout under Section 10(10D) of the Income Tax Act. However, these benefits apply only under the old tax regime.

“Rationalising income-tax deductions for life insurance premiums under both old and new tax regimes, expanding the threshold for taxing high-value policy payouts, and ensuring tax parity for annuity and pension products could bolster long-term retirement planning,” said Vipin Upadhyay, Partner, King Stubb & Kasiva, Advocates and Attorneys.

Tax analysts say that the introduction of distinct tax deductions for term life insurance premiums can be modelled on the additional deductions available for pension savings under the National Pension System (NPS).

“Experts are also pressing for consistent tax treatment of life insurance gain outcomes, noting that traditional policies with higher annual premiums face less favourable tax rules compared with unit-linked contracts,” said Rajarshi Dasgupta, Executive Director (Tax), Aquilaw.

Resolve Input Tax Credit anomaly

The industry is also seeking a resolution to the input tax credit (ITC) on goods and services tax (GST). ITC allows businesses to offset taxes paid on purchases, and insurers say its non-availability significantly increases costs and impacts profitability from policies.

Although GST exemptions on retail life and health insurance have eased costs for policyholders, insurers remain unable to claim input tax credits on critical services such as distribution, customer support, and technology.

“These unrecoverable expenses elevate operating costs and eventually translate into higher premiums. The industry is urging the government to introduce a more flexible input credit framework and undertake broader GST rationalisation in Budget 2026 to contain cost escalation,” said Parimal Heda, Chief Investment Officer, Go Digit General Insurance.