Budget can turbocharge Fintech

The goal of financial inclusion and a stronger Fintech ecosystem essentially hinge on tackling challenges pertaining to affordability, accessibility and distribution

Once again, all eyes are on the country’s most important financial event of the year - the annual Budget 2025. As February 1 approaches, there is an air of anticipation within India’s Fintech and insurance sectors. With more than 100 crore people still bereft of financial protection, India’s journey towards universal financial inclusion remains far from over. At a macro level, the Fintech and start-up ecosystem also seeks policy support to overcome funding challenges, enable sustainable growth and enhance credit access.

The goal of financial inclusion and a stronger Fintech ecosystem essentially hinge on tackling challenges pertaining to affordability, accessibility and distribution through reforms in the upcoming Budget. While the industry has made steady progress with the support of several government-led initiatives, Budget 2025 could mark the next phase of growth and financial protection.

Reassessing tax benefits associated with insurance

One of the foremost reforms expected from the insurance sector is a reconsideration of tax structures under Section 80C and 80D. The current deduction limit under 80C has been Rs 1,50,000 for quite a few years now, which also gets consumed due to several other allowable declarations like PPF and loans, leaving little room to accommodate all crucial financial decisions. To address this, there’s a need to introduce an exclusive exemption category just for a crucial pure protection product like term insurance. By doing so, taxpayers would be incentivized to opt for term plans with higher coverage, promoting financial security for individuals and families.

Additionally, raising the limit under 80D to Rs 50,000 for self, spouse and dependent children, and Rs 1 lakh for senior citizen parents will bring the spotlight on health insurance. Also, Health Savings Account (HSA) is a new concept which promotes consumers to save money, in order to make a health corpus which can be used in emergencies. This should be made tax exempt, and customers should be allowed to withdraw money only for healthcare expenditure. This would provide individuals with more disposable income to plan for escalating healthcare expenses, fostering a proactive approach towards health and well-being.

Also, retirement planning needs to be incentivised in India to ensure a sound financial future in later stages of life. To address this concern, the insurance sector calls for the same tax treatment for pension products as NPS. As of now, the existing tax norms levy tax on the entire annuity income, inclusive of both principal and interest. A tax-free annuity income derived from these products will help with a wider adoption.

The reconsideration of the GST rate, which currently stands at 18 percent for both health and term insurance, is already under discussion. A revised GST rate can ensure that the pricing benefits reach the end consumers and this encourages more people to invest in insurance.

Nurturing the Fintech ecosystem through supportive policies

India’s Fintech ecosystem stands among the top three globally funded markets, despite a turbulent 2024 that saw a 33 percent decline in funding compared to the previous year. However, a rebound in the latter half of 2024, with $778 million raised in Q3 alone, signals resilience and recovery. Startups, particularly in the Fintech space, require stronger policy support to navigate funding challenges and sustain innovation. Fundraising is a competitive space, with multiple start-ups vying for the same share of investors. The sector has also faced a slowdown in demand amid geopolitical headwinds. Just as the removal of the Angel Tax was a game-changer for the startup community, it is now essential to think beyond conventional measures -

#Encouraging subscription models, data monetisation and licensing partnerships can help create diversified revenue streams for start-ups. Easing credit access and addressing cash flow constraints through targeted measures could also be critical in enabling innovation and inclusion.

#Considering how crucial it is for start-ups to recruit and retain top-tier talent, tax reforms for Employee Stock Option Plans (ESOPs) remains a critical ask. Taxing ESOPs only at the time of sale rather than at the point of exercise could bring some relief particularly for the higher income brackets and in turn, help the start-up ecosystem to attract competitive talent.

#Group health insurance is a fail-safe way to make insurance more scalable and accessible for the masses, and so, it needs to be better incentivised. However, what makes this challenging for businesses is that they cannot take input credit for GST paid on employee health insurance. While it might not be feasible for the government to waive it off for organizations of all sizes, it should at least be considered for MSMEs as they form the backbone of India’s entrepreneurial future.

As India positions itself as a global leader in fintech and financial inclusion, Budget 2025 presents a unique opportunity to catalyse innovation and ensure equitable growth. While the collective realisation for financial security is gaining momentum, tax incentives might just be the nudge needed at this juncture to match up the index to the global average.