Everyone wants to save on tax and doing the same through life insurance serves a dual purpose of saving tax and insuring your life. Yet, the rules of taxes on deduction of insurance premiums are dynamic and ever-changing, making it difficult for common men like you and me to keep up with it. Therefore, you have to be constantly updated about them so as to buy the most beneficial and latest life insurance plans.
Thus, this article has been curated to help you understand the ever-changing taxation laws. This will subsequently help you find the most popular life insurance plans in 2018 and the best life insurance companies for it while keeping the tax saving purpose as the foremost priority.
Steps to Save Tax in Life Insurance
There are only three life insurance avenues that can help maximize tax-savings:
1) Life Insurance
Life insurance is an important contract that offers financial cover to your family in your absence. Life insurance policies come in numerous arrangements with endowment plans, term strategies, whole life policies, money back plans, and unit-linked plans (ULIPs). All of these policies will surely save you some tax money as the premiums paid on them help you avail tax deduction as per sections mentioned in the Income Tax Act, 1961.
2) Pension plans
Pension plans are different from life insurance policies as they are geared only to provide for you and your family after your retirement. The pension plan process has two phases – accumulation and withdrawal. The accumulation phase is marked with you setting aside a fixed amount of money p.a. in your earning years, while the next phase involves withdrawing money from the same plan after your retirement.
3) Health insurance or Mediclaim:
Health insurance or Mediclaim is a category of life insurance policies that cover the expenditure of accidents or hospitalizations. Also, it covers the pre-hospitalisation as well as the post-hospitalization costs, subject to the maximum amount of money assured.
Tax Saving Advantages in Life Insurance
Tax savings in life insurances and their benefits can only be availed from under three sections of the Income Tax Act of 1961 and its subsequent amendments:
1. Advantages under Section 80C of the Income Tax Act:
Tax exemption of up to INR 1.5 lakh p.a. is allowed under this Section of the Income Tax Act, 1961. This benefit can be availed by you yourself, your spouse, and your dependent children.
Clauses for the deductions under this section:
- Term insurance plan allotted on or after April 1, 2012, will have tax deduction applicable only for the whole premium sum prized up to 10% of the maximum amount guaranteed.
- Term insurance plan issued on, or prior to March 31, 2012, will have tax deduction applicable only for the aggregate premium adding up to a maximum of 20% of the amount assured.
- The tax deduction is applicable if you haven’t paid premiums amounting to 15% or more of the total sum assured, if and only if you are suffering from any disabilities or ailment and is applicable for a plan that has been given out on or after April 1, 2013.
Also, if you are a member of the Hindu Undivided Family (HUF), then too you can avail the above tax gains under this section.
2. Advantages under Section 10 (10D) of the Income Tax Act:
This Section of the Income Tax Act offers exemption benefit to you. It ensures that any sum received under death benefit for the term or money back policy and maturity benefit for a money back policy, comprising any possible bonuses is excused from tax. The only clauses tax deduction won’t be applicable to are:
- Money received under Section 80DD (3) or 80DDA (3).
- Money received under the Keyman Insurance Policy.
- Money received but not being a part of the death benefit for a plan allotted on or after April 1, 2003 but on or before the 31st day of March, 2012 or if the total premiums paid during the policy period are more than 20% of the total sum assured received.
Term insurance plans issued on or after April 1, 2012 are applicable for exemption, only if the complete premium paid doesn’t surpass 10% of the amount guaranteed.
3. Advantages under Section 80D of the Income Tax Act:
This Section of the Income Tax Act permits tax profits on health insurance premiums. Hence, if your term insurance or money back plan has an engrained or add-on health insuring cover, then you yourself, your spouse, parents, or dependent children can avail tax gains.
Clauses for the deductions under this section:
- Tax deduction can be availed solely for a sum not beyond INR 25,000/-
- Eligible for additional tax deduction benefit of INR 25,000/-, if the policy is in your parent’s name.
- Eligible for a greater tax profit of INR 30, 000/-, if the policy is in your senior citizen parent’s name.
Also, if you are a member of the Hindu Undivided Family (HUF), you can avail the above tax gains under this section.
Although saving tax is a pretty lucrative deal, you should not deviate from the main purpose of the life insurance policy. Everything else should just be thought of as an added benefit of it. So, you should carefully examine, compare, and choose a life insurance provider this year with the help of Coverfox.com and the find the best fit that serves your dual purpose of offering a life cover along with an effective tax saving tool.