This is an excellent tax break because it incentivises health insurance and preventive care. As per government statistics over 70% of health care is paid for from personal savings. This is high and ideally personal savings should be the last resort for healthcare expenses, after insurance has been fully used. The government should have two objectives for section 80D. To encourage more people to buy health insurance and to have them buy the right amount of sum assured. To achieve this the income tax exemptions in section 80D should be increased, ideally doubled.
The current tax exemptions do not incentivise purchase of sufficient health insurance. The table below, from SecureNow’s database of all health insurance products currently available in the market, illustrates this.
|Product||Section 80D exemption limit (Rs)||Number of products available||Average premium (Rs, including taxes)|
|Family floater for Rs 20 lakhs sum assured, eldest age 30||25,000||45||28,700|
|Family floater for Rs 5 lakhs sum assured, eldest age 45||25,000||86||23,200|
|Individual Insurance of Rs 10 lakhs each for a family with two persons age 45||25,000||73||30,600|
|Family floater for Rs 10 lakhs sum assured, eldest age 45||25,000||73||32,400|
|Family floater for Rs 20 lakhs sum assured, eldest age 45||25,000||45||42,800|
|Individual Insurance of Rs 20 lakhs each for a family with two persons age 45||25,000||45||44,000|
|Individual Insurance of Rs 10 lakhs each for two persons age 60||50,000||73||63,000|
|Individual Insurance of Rs 5 lakhs each for two persons age 75||50,000||16||95,000|
|Individual Insurance of Rs 10 lakhs each for two persons age 75||50,000||18||1,26,624|
 For family floaters where the eldest person’s age is 30 years we have assumed a family of 3 i.e. spouse and 1 child are included in the family
 For family floaters where the eldest person’s age is 45 years we have assumed a family of 4 i.e. spouse and 2 children are included
 For all the individual insurances we’ve considered the total premium for 2 individuals, self and spouse, assuming that that there is one wage earner who gets the Section 80D benefit
At the very minimum taxpayers in cities should have Rs 10 lakh of health insurance. In fact, I would argue that if one takes a long term view, then the cover should be at least Rs 20 lakh per person. For a health insurance cover of Rs 10 lakh today, the tax exemption will generally not cover current insurance premiums. The uncovered difference increases with age and is maximum for senior citizens. It is possible to buy a lower insurance cover of Rs 5 lakh within the exemption limits. However, these Rs 5 lakh covers are also those where often the room rent caps and other limits are most restrictive. Also, a Rs 5 lakh cover is inadequate even today if multiple family members are hospitalised. This has been common enough during the pandemic with entire families falling ill at the same time.
The pandemic has served as a clarion call to increase sum assured levels. Most families saw a sharp increase in health care costs because multiple people in the family fell ill, hospital costs increased because of capacity constraints and the use of extensive PPEs, and the average stay in a hospital has increased from 2 to 3 days to a week or more for covid patients. In many of our clients we saw a 50% or more increase in health care expenditure during covid. Given the regularity with which new covid strains are emerging we must increase health insurance sum assured to cope with rising costs.
The government has allowed up to Rs 5,000 of the exemption limit to be used for preventive health check-ups. I am all for annual health check-ups to detect medical issues early. However, since the exemption limits are already low, an inadvertent outcome is that taxpayers who use the preventive health check expenditure to claim exemption under section 80D have even less of the overall exemption limit left for health insurance. Both are important and a higher limit will solve this problem.
From the government’s perspective it should aim to have taxpayers buy at least Rs 10 lakh of sum assured today. High medical inflation is the primary reason for this. According to the government’s BRICS Joint Statistics 2021, the Consumer Price Index (CPI) in health has been increasing at about 6% per annum over the past few years. The CPI in cities will certainly be higher. When I look at our own database of several thousand claims the medical inflation appears to be more in the 10% to 15% region. The increases come from higher hospital room rates, patients upgrading their rooms, and steady creep in treatment costs. Many people hospitalised during the pandemic were out of pocket because room tariffs rose higher than the General Insurance Council (GIC) recommended rates. As insurers compensated based on GIC’s recommendations and hospitals charged based on market dynamics, the insured persons bore the difference. A higher sum assured without room limits would reduce such issues in the future.
Health insurance and the associated sum assured that you buy today is meant to insure you for medical emergencies for life. Some years ago the insurance regulator, IRDAI, introduced the excellent lifelong renewability feature in individual health insurance. So, the sum assured that you buy now should be able to take care of your medical emergency expenses even two to three decades later. To estimate this sum assured, current costs need to be compounded at expected medical inflation rates. For example, inserting a stent currently costs between Rs 2.5 to 5 lakhs in a good tertiary hospital. A 35-year old may require a stent 20 years later when the inflated cost will be Rs 20 to 30 lakhs. Even if his current insurance has a generous no-claim bonus it is going to fall severely short of the cost of treatment when that is actually needed. That’s why higher sum assureds should be encouraged by tax policy today. The average premium across different sum insureds as shown in the table above shows that the tax exemption limit in most segments is considerably short of the premium payable and this gap will only increase in the future as sum assured requirements increase.
Another tax change that will immediately increase the take-up of health insurance is to lower the GST tax slab from 18% to 10 or 5%. This reduction has a direct impact on overall insurance premiums and will make the purchase much more affordable.
These changes may not cost the exchequer a material amount because the loss of tax revenue could be partially offset by the reduction in dependence of the insured population on government hospitals and health infrastructure.
(The author is Co-founder, SecureNow Insurance Broker.)