Budget 2026 expectations: Equitable pension treatment, consistent tax norms, sharper micro insurance support

By Tarun Chugh

As India charts its economic course for the coming year, the insurance sector remains a key pillar in household financial planning and risk mitigation. Recent regulatory efforts and initiatives have supported sectoral growth, yet broad measures of insurance engagement show there is still significant ground to cover. According to the Insurance Regulatory and Development Authority of India’s annual report, India’s overall insurance penetration stood at 3.7 percent of GDP in FY24, with life insurance coverage at 2.8 percent. This level remains below the global average of over 7 percent. As per a PwC India report on insurance inclusion, in rural India, where around 65 percent of the population resides, less than 10 percent of people have life insurance coverage.

These insights serve as a reminder that despite progress, access to financial protection is still limited for large sections of the population. With this context, the upcoming Budget offers an opportunity to strengthen policy support. My recommendations below aim to enhance customer outcomes, improve long term savings participation, and support national goals of financial inclusion and resilience.

Ensuring Retirement Products Compete on Merit

India’s pension ecosystem continues to face a significant coverage gap. While the National Pension System and other formal pension schemes continue to expand, India's formal pension coverage remains below 25% of the workforce according to the Mercer-CFA Institute Global Pension Index 2025. The report ranks the country 45th out of 47 nations for pension adequacy. Life insurance annuity products and the National Pension System both aim to support retirement income, yet their tax treatment differs considerably.

Insurance annuity payouts are taxed on the full amount, including the principal that has already been taxed during the earning years. NPS subscribers, on the other hand, receive additional deductions for self-contribution and employer contribution. This difference in treatment often influences consumer decisions more than product suitability.

A more aligned and tax efficient framework across financial products, for example taxing only the returns on annuity payouts and extending comparable deductions to insurance annuity pension products, would allow individuals to choose based on their long term needs rather than tax benefits. Such alignment would encourage more Indians to build structured retirement plans.

Encouraging Long-Term Wealth Building Through Parity

Over the last few years, high-value traditional insurance policies have received different treatment. For example, for all policies whose annual aggregate premium is higher than Rs. 5 lakh, the maturity proceeds are now taxed at regular income tax rates. These policies, which provide significant life cover in addition to disciplined wealth accumulation, started to be considered less attractive when compared to other alternatives of investment.

Meanwhile, high-value Unit Linked insurance policies, whose annual aggregate premium is higher than Rs. 2.5 lakh premium get long-term capital gains treatment, usually more generous and tax efficient. Therefore, introducing similar tax treatment of capital gain on high-value traditional insurance policies as well and bringing both to the same tax treatment would create consistency, simplify the tax code, and encourage more people-particularly business owners, double-income families, and senior professionals to combine protection with savings.

Enhancing Affordability of Social and Rural Insurance through Stamp Duty Reforms

As insurance companies strive to meet rural coverage requirements, affordability becomes crucial. Even modest transaction costs such as stamp duty can influence pricing for low ticket products. Exempting rural and social sector policies from stamp duty, similar to the exemption already provided under PMJJBY, would help improve affordability and support deeper penetration.

Life insurance can play an important role in shaping India’s long-term financial resilience. While the sector has made progress in expanding access and adapting to changing customer needs, data shows that penetration and coverage gaps persist. Thoughtful policy changes in the upcoming budget can support a more efficient, equitable, and inclusive insurance ecosystem.

In the end, financial security should not remain a privilege of a few but be strengthened as a shared foundation for every household.

(Tarun Chugh is Managing Director and CEO, Bajaj Life Insurance)