Key Budget Announcements
Following an intensive dialogue between the Department of Financial Services in the Finance Ministry with stakeholders, the budget has accounted for key reforms suggested by the insurance industry.
100% FDI in insurance
The sector’s longest standing demand has been to increase the limit on Foreign Direct Investments (FDIs) for insurance. In this budget (2025), the Finance Minister acknowledged this need by hiking the FDI limit in the insurance sector to 100 percent from the existing limit of 74 percent introduced in 2021 [1] .
This change in limit will reflect in the Finance Bill of 2025. The revised limit will be offered to companies which will invest the entire premium in India [2] . The insurance sector, which opened up to private insurers in 1999, has been seeking this increased limit on FDI to attract global investors and significant capital inflows [3] .
Tax Changes for ULIPs
The budget 2025 has addressed the need for more clarity in income on redemption of Unit Linked Insurance Plan . At present, ULIPs issued from 1 Feb. 2021 where the premium exceeded Rs 2,50,000 annually were treated as a capital asset. Those below Rs 2,50,000 or issued till January 2021 irrespective of premium amount but exceeded annual premium payable beyond 10% or 20% of the sum assured under section 10 (10D) of IT were not treated as capital asset.
The amendment introduced by the Finance Ministry proposes to amend the definition of ‘capital asset’ to include all kinds of ULIPs whether they are High Value ULIPs or non-qualifying ULIPs. The amendment suggests that all taxable ULIPs will be taxed as ‘capital gains’ effective from April 1 2025.
Making India An Investment Destination
The 2025 budget has bolstered its commitment to making India an attractive investment hub. A slew of tax incentives was announced for units at the IFSC (International Financial Services Centre) in the past few years. In the 2025 budget, it is proposed to exempt the proceeds from life insurance policy issued by the IFSC insurance intermediary office, revoking the condition on maximum premium amount to promote more activities at the Centre[5] . Moreover, the deadline to claim benefits to commence in IFSC has been pushed by 5 years to 31st March, 20 30[2] .
The Rural Opportunity
In an effort to meet the vision of Insurance for all by 2047, the budget has enhanced its insurance accessibility in rural areas, where penetration has been consistently low. The repositioning of India Post as a catalyst for boosting the rural economy can be a huge step in creating a wider outreach to underserved communities. Insurers can also refer to the new Grameen Credit Score framework aimed at improving risk assessment for rural customers [6] .
Implications for Policyholders
Opening up the sector to foreign investment has the potential to welcome global insurance firms, create more employment opportunities and ensure more capital. As for policyholders, increased FDI will mean that the market size has gotten bigger resulting in more options. It will open doors to better customer service, more product offerings, more branches of companies, competitive pricing and an increased insurance penetration in all geographies [7] .
Insurance Industry Experts Weigh In…
“Increasing the FDI limit to 100 percent is a significant step towards attracting foreign investment, boosting competition, and fostering innovation within the sector,” says Shruti Ladwa, Partner and Insurance Leader, EY India [8] . She adds,” This move could lead to a wider range of diverse and affordable insurance options for Indian consumers, ultimately improving both choice and coverage quality.”
Keyur Shah, Tax Leader for Financial Services at EY India says the 100 percent FDI in insurance could be a ‘game changer’. However, he raises concern over the conditionalities to be prescribed and the insurance company getting the 100 percent FDI does not invest its premiums outside India [9] .
On the IFSC boosting incentives, Keyur Shah adds, “One interesting proposal relates to the income tax exemption to non-resident investors in any unit in the IFSCA (not only banks) from transfer of non-deliverable forwards, offshore derivative instruments or over the counter derivatives. Including any distribution of income arising from these instruments. This should incentivize funds here to issue such instruments from other offshore locations to move base to IFSCA.” [9]
As for the changes to ULIP taxation, Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance, says, “The proposed clarification on ULIP taxation is a welcome step towards greater transparency and consistency in tax treatment. This shift from taxation under ‘income from other sources’ to capital gains brings more clarity and fairness, reinforcing ULIPs as a compelling long-term investment option. [4] ”
“We view this as a progressive move that will enhance customer confidence and encourage disciplined financial planning,” he adds [4] .
The 2025 budget’s proposals for the insurance sector also include digital infrastructure improvements. The new Central KYC registry is expected to roll out in 2025, which will structure the process of customer onboarding which will help it become faster and efficient for insurers to engage with new clients [6] .
In case of international operations, the introduction of Bharat Trade Net, a unified platform, will make the process of Indian insurers interacting with global markets a lot easier. A streamlined insurance process will also make it easier for global markets to invest in India [6] .
Budget 2025 Dedicated to The Middle Class
Releasing more cash for citizens to increase spending and stimulate growth has been one of the key focus areas for this budget. The FDI boost for insurance can help players explore untapped markets and reach a much wider customer base [1] . Since the 100% FDI is allowed only for premiums invested in India, it will make sure the capital fuels the Indian economy.
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