- Save Tax With A Life Insurance Policy
- Assess Various Factors Of Your Life Before Purchasing A Policy
- Additional ‘Exempt-Exempt-Exempt’ Benefit On Life Insurance
This financial year, include life insurance as part of your investments to save taxes. Let us look at how you can use your life insurance policy as an effective tax-planning tool.
Key tax benefits offered by life insurance products:
- You can avail tax benefits by way of deduction towards the premiums you pay on your life insurance policy. A maximum of Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961 can be deducted. You can also include the premiums you may pay towards a policy for your spouse or child.
- Under Section 80CCC, if you have a pension or annuity plan, you can receive a deduction up to Rs. 1.5 lakh. Upon maturity, two-thirds of the income becomes taxable while the rest is tax-free.
- Premium paid on health insurance policies: Under this section, premium payment towards medical insurance is exempted up to ₹25,000/ for self/ family and also up to ₹50,000/- for health/medical insurance in respect of parent/ parents (senior citizens) of the assesse.
- When the nominee of your policy receives the sum assured, the claim amount is also tax-free under Section 10(10D), subject to specified conditions.
- Life insurance also comes with an additional EEE (Exempt-Exempt-Exempt) benefit – the amount you invest; the amount your investment earns; and the amount that you finally receive, are all exempted from income tax.
However, before choosing life insurance as a tax-saving instrument, you must keep in mind the following points:
- Your life insurance policy will qualify for a tax deduction (in case it is issued after April 1, 2012) only if the premium you pay does not exceed 10% of sum assured. If your policy is issued before this date, premium you paid should not have exceeded 20% of the sum assured.
- If you surrender the insurance policy before 2 years and 5 years (for traditional and ULIP policies respectively), the tax deducted will be reversed.
Tax benefits on riders
You can add various riders and extra benefits for a minimal cost. Riders like critical illness, waiver of premium, personal accident and disability insurance offer tax benefits as well.
If you are paying any extra premium for these riders, those are also eligible for tax deduction in line with health and life covers. If you have a health cover, you can claim tax benefits up to Rs. 25,000 for yourself, your spouse and children under Section 80D. You can avail extra tax deductions if you pay premiums up to Rs. 30,000 as a medical cover for your parents if they are senior citizens.
The riders will determine the nature of tax benefit. For example, a critical illness rider will fetch tax benefits under Section 80D.
How can I select the right life insurance cover?
Before you finalize your life insurance policy, there are a few pointers that you must be aware of. A life insurance policy is different from all other financial products. This is because its main aim is the protection of your financial interests and thus, it should be the foundation of your financial planning. To decide what cover to avail, assess your annual income, liabilities, any existing covers, your age, and any financial dependents you may have.
A life insurance policy is an excellent way of saving taxes. However, purchasing it just for tax benefits might not be ideal. Keeping in mind your needs will help you gauge the premiums you can afford. In addition, being aware of the latest tax changes can help you receive full benefits available on a wide range of products