Moody’s corporate headquarters in New York. File
| Photo Credit: Reuters

Increasing foreign investment limit in the insurance sector to 100% from 74% is likely to attract more global players in the growing Indian insurance market, Moody’s Ratings said on Tuesday (February 4, 2025).

Additionally, strong premium growth is expected to boost profitability of the sector.

Currently, many foreign insurers are present in the country through joint ventures and could seek to increase their ownership stakes in their Indian affiliates following this change in regulation.

“We view foreign investment as credit positive because it increases product innovation. The presence of foreign stakeholders also brings benefits in the areas of capital adequacy, financial flexibility and governance standards,” Moody’s Ratings said in a statement.

Presenting Budget 2025-26, Finance Minister Nirmala Sitharaman proposed to raise the foreign investment limit to 100% from 74% in the insurance sector as part of new-generation financial sector reforms.

Moreover, Moody’s believes that the reduction in personal income tax will have positive trickle-down effects for the insurance sector.

“Increased levels of disposable income in the middle-class segment, the insurance sector’s largest target market, bodes particularly well for health insurance, given increasing awareness around well-being and protection in the post-COVID era,” it added.

These changes will further boost the Indian insurance industry’s growth prospects, which are already favourable.

In the budget, Sitharaman announced an increase in the personal income tax threshold below which taxpayers owe no tax to Rs 12 lakh, from Rs 7 lakh, as well as a rejig in tax brackets that would help those earning higher than that save up to Rs 1.1 lakh.

Moody’s said that strong economic growth supports average household incomes and increasing demand as a result of consumers’ increasing risk awareness and the steady digitalization of the Indian economy, which facilitates the distribution and sale of insurance products.

Indian insurers’ total premium revenue rose 16 per cent to Rs 9.2 lakh crore in the first eight months of fiscal 2024-25, driven by a 21 per cent increase in health insurance and an 18 per cent increase in new business written in the life sector. This marked an acceleration from fiscal 2023-24, when premiums were up 8 per cent  year-on-year to Rs 11.2 lakh crore.

On fiscal consolidation, Moody’s said the budget signalled “a slowing pace of fiscal consolidation as focus shifts to reinforcing growth”.

The planned cuts to personal income tax rates will bolster middle-class spending power and consumption, which is credit positive for many corporates and the financial sector.

However, the resulting foregone revenue will slow the pace of the country’s fiscal consolidation even as total spending declines as a share of GDP. Moreover, the proportion of spending allocated to debt servicing continues to increase.

The Finance Minister pegged the fiscal deficit for FY25 at 4.8 per cent of GDP and 4.4 per cent for FY26.

Cover for all: The reform is about reshaping insurance landscape to ensure every individual, business can access risk protection
| Photo Credit: Sushil Kumar Verma

Finance Minister Nirmala Sitharaman on Saturday said the foreign direct investment (FDI) limit for the insurance sector will be raised from 74% to 100%.

However, the “enhanced limit will be available for those companies which invest the entire premium in India,” she said, announcing the proposal to remove the cap on FDI, on the condition, in Budget 2025-26 speech.

Current guardrails and conditionalities associated with foreign investment will be reviewed and simplified, she said.

The government in 2020 had permitted 100% FDI in insurance intermediaries such as insurance brokers.

In November 2024, the Department of Financial Services had initiated the process of public consultation on raising FDI in Indian insurance companies from 74% to 100% as well as enabling an insurer to carry on one or more classes of insurance business and activities related/incidental to insurance.

At the heart of the measures is ‘Insurance for All by 2047’ goal being pursued by the government.

Insurance industry leaders and top executives were quick to welcome the Budget proposal.

Attract investors

“The decision to allow 100% FDI in the insurance sector will attract global investments, strengthen the industry and foster innovation. The move promotes healthy competition, leading to better services, more choices, and potentially lower premiums for consumers,” said PB Fintech Joint Group CEO Sarbvir Singh.

The reform is not just about increasing capital inflows — it is also about reshaping the insurance landscape to ensure every individual and business has access to risk protection. “As competition intensifies, we will see more transparency, faster claims processing and stronger trust in the industry,” Bajaj Allianz General Insurance MD- CEO Tapan Singhel said.

The announcement comes even as wait for customers on reduction in the Goods and Services Tax on insurance, especially health covers, from existing 18% grew longer with the GST Council deciding on further deliberations before taking a decision.

“Global insurance companies can now invest fully and we anticipate the emergence of innovative products and services tailored to meet the diverse needs of Indian consumers,” Universal Sompo General Insurance MD and CEO Sharad Mathur said.

The Budget raised the threshold to deduct or collect tax at source on insurance commission from ₹15,000 to ₹20,000. The rate of deduction of income tax at source on insurance commission will be cut from 5% to 2% with effect from April 1.

The Union government is also proposing to exempt the proceeds received on life insurance policy issued by International Financial Services Centre (IFSC) insurance intermediary office without the condition on maximum premium amount.