Budget 2025: Strong case for higher 80D tax deduction under old and new tax regime now makes sense

Income tax in Budget 2025: Why section 80D limit for health insurance premium must be raised and allowed in New Tax Regime

One of the long-standing demands of the general public is an increase in section 80D tax deduction for health insurance premium paid, under the old tax regime. However, section 80D of the Income Tax Act, 1961 which allows a tax deduction up to a specified limit for medical insurance premium has remained unchanged for many years. For general citizens below the age of 60 years, the limit for 80D deduction was raised from Rs 15,000 to Rs 25,000 in budget 2015 and it has not changed since then. For senior citizens the deduction limit was raised from Rs 30,000 to Rs 50,000 in the budget 2018.

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A strong case for an increase in the limit under section 80D in the upcoming Budget 2025 can now be made considering the significant rise in healthcare costs recently.

What is the current section 80D tax deduction limit?

If you are below the age of 60, you can claim up to Rs 25,000 deduction for paying health insurance premium. The health insurance policy can be taken for coverage of policyholder, his/her spouse and their dependent children.

An additional deduction for insurance (premium) for parents is available up to Rs 25,000 if they are less than 60 years of age. If the parents are 60 years old or above, the deduction amount could go up to Rs 50,000. From FY 2015-16 a cumulative additional deduction of Rs 5,000 is allowed for preventive health checkups. However, this deduction of Rs 5,000 is limited to the umbrella limit of Rs 25,000 or Rs 50,000 depending upon the age of the parents.

Do note you will not be able to claim this deduction in the new income tax regime. Only if you opt for the old tax regime then you can claim deduction under section 80D.

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Why the tax deduction under section 80D for health insurance premium paid should be increased

According to Aarti Raote, Partner, Deloitte India, the rising cost of medication and the increased incidence of critical ailments in recent times always takes a toll on the finances of the taxpayers in addition to the mental pressures. “Hence, health insurance is definitely recommended. Most taxpayers opt for health insurance to address any surprises.”

Raote says, “However, post COVID there is a surge in the health insurance costs and the need for larger coverages has increased. Given the serious situation at hand, the current deduction limit for 80D doesn’t meet the financial burden on the individuals, especially those supporting elderly parents or inlaws.”

Raote further adds: “Hence it is advisable that the Government should extend this deduction to the taxpayers opting for Simplified Tax Regime but also revisit the deduction limits as the current limits for health insurance premiums are inadequate. A higher deduction would alleviate the financial burden for the taxpayers and help provide increased relief for them.”

Rahul Charkha, Partner, Economic Laws Practice (ELP), says, “Over the last few years, health insurance premiums have increased by more than 25% annually for some age slabs. With the increase in awareness and hike in premium, it would be judicious to provide an aggregate deduction of up to Rs 2.5 lakh for health insurance premium and medical expenditure (the prevailing provisions provide for a maximum deduction of Rs 1 lakh under the old tax regime). This would provide impetus to the taxpayers who will have more security and gain tax advantage.”

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Shilpa Arora, Co-Founder & COO, Insurance Samadhan, "As we move closer to the Union Budget 2025, more industry stakeholders are hoping for reforms in the health insurance regime. In this regard, consumers and health insurance companies are seeking tax relief and an increase in exemption limits to make policies more accessible. The prevalence of lifestyle disorders such as diabetes and hypertension, the rising cancer cases, and the soaring medical inflation, which currently stands at 14%, are making it challenging to manage medical expenses. Typically, to ease this financial burden, people opt for medical insurance. This makes it more crucial for the government to incentivize families to opt for higher-sum insured policies. Such policies, while requiring higher premiums, provide essential financial protection amid escalating healthcare costs. Currently, under Section 80D of the Income Tax Act, customers can get a deduction of up to Rs 25,000/year for health insurance premiums, while for senior citizens, the limit can exceed Rs 50,000/year. Additionally, consumers can opt for an extra Rs. 5,000 claim for preventive health checkups."

Arora says: "However, I believe the government should increase the Section 80D tax exemption limit for health insurance under the old tax regime. Elevating the current limits will provide more tax relief to customers and encourage consumers to invest in health insurance. Such a move would be in the interest of consumers and help them safeguard their financial interests against rising medical inflation rates and rising premium costs. Interestingly, GlobalData suggests that the Indian health insurance sector will grow at a CAGR of 12.8% and reach 2 trillion by 2028. This growth could be driven by factors such as rising financial awareness, increased medical inflation concerns, and the availability of tailored insurance products."

Why does the health insurance premium tax deduction need to be extended to the new tax regime also?

According to Charkha, tax deduction for health insurance premium is more of an economic centric than tax saving(s) tool considering the fact health costs have arisen. Hence a case for this deduction being given in the new tax regime makes sense.

He says: “About 75% of Indians pay for medical services from their own pockets. They are not covered by any government or private health insurance schemes. The Covid-19 pandemic acted as a wake-up call after which the health insurance premiums increased substantially. The world was still recovering from the Covid-19 pandemic when the threat of HMPV outbreak raised alarms globally. The changing lifestyle resulting in unanticipated health hazards to those even in their prime has raised health concerns across the nation. In situations such as these, health insurance plays a major role in providing financial protection and access to healthcare facilities. To encourage taxpayers to make a provision for health emergencies, it is imperative that health insurance deductions be provided under the new tax regime as well.”

This story originally appeared on: India Times - Author:Faqs of Insurances