Indian insurers push for higher tax-free thresholds to spur long-term capital

Indian life insurers are lobbying the government to double the tax-free limit on insurance policies from 500,000 rupees, aiming to revitalize stagnant inflows. The industry argues that current caps, implemented in February 2023, have stifled the growth of non-unit-linked schemes and reduced demand for essential long-term government debt.

Growth in non-ULIP insurance schemes slowed significantly following the 2023 tax adjustments, with inflows rising by just 2% and 5% in the last two fiscal years. This marks a sharp decline from the double-digit growth seen previously. Insurers contend that raising the threshold is a vital step toward securing the domestic capital necessary to anchor India’s fiscal expansion.

Beyond individual savings, the proposal serves a broader macroeconomic interest. These insurance funds are primary buyers of ultra-long-term bonds, a market segment currently facing pressure as the government balances its borrowing needs. Traders suggest that supply constraints for these long-maturity papers will force the government to increase issuance in the second half of the fiscal year. Arun Srinivasan of ICICI Prudential Life Insurance noted that the policy change would provide the critical domestic support required for the state's borrowing requirements. The Life Insurance Council formally submitted the request to the government earlier this month, though regulators have yet to comment on the potential adjustment.