Financial planning majorly includes investment planning and tax savings. If planned properly, this can accomplish two purposes; assist individuals in reaching their financial objectives and reduce tax obligations. Life insurance presents an ideal financial instrument to secure the financial future of your loved ones and avail tax benefits as well.
Several life insurance products in the market are formulated to cater to different life needs. While term insurance offers pure life cover, options like ULIP have the dual benefit of life cover and investment for building wealth.
How can Life insurance help you in Tax Savings?
Every individual’s financial portfolio should include life insurance. Life insurance policies include different plans, such as endowment plans, term plans, and ULIPs, among others. Premiums from these plans can be claimed as deductions, making them a preferred tax-saving option.
Life insurance offers tax benefits under multiple sections as per the provisions stated in the Income Tax Act 1961.
1. Term insurance
Term insurance is a type of life insurance that offers financial security to the nominees (family members) of the insured individual after his/her demise during the policy term. In this case, the nominee can claim death benefits from the life insurance company.
- Term life insurance offers coverage benefits in the form of a one-time payment or installments over a set amount of time. One can claim a tax deduction of up to INR 1.5 lakhs per year on premiums paid under Section 80C of the Income Tax Act, 1961.
- The death benefit received by the nominee is exempt from tax.
2. Endowment Policy
This is a type of life insurance plan that offers both death and maturity benefits. In case of the policyholder’s demise, the nominee receives death benefit in the form of a sum assured. The maturity benefit, on the other hand, is a lump sum payout that the policyholder gets upon surviving the policy term. The premium amount paid on endowment plans qualifies for tax deduction up to a maximum limit of Rs.1,50,000 under Section 80C of the Income Tax Act, 1961, and the death benefit received is exempt from tax under Section 10(10D) of the Income Tax Act, 1961.
In addition to serving the dual benefit of life coverage and investment, ULIPs also offer life insurance tax benefits. The premium paid is deductible up to INR1,50,000 under Section 80C of the Income Tax Act, 1961. The amount received on the maturity of ULIPs is tax-free under Section 10(10D) of the Income Tax Act, 1961 when the premium paid for the entire term is at least 10% of the sum assured for ULIPs purchased from 1st April 2012 onwards and 20% of the sum assured for ULIPs purchased before 1st April 2012.
4. Money back Policy
A money-back policy is a type of life insurance that enables the insured to get a portion of the sum promised at regular intervals as opposed to a fixed sum payment at the conclusion of the policy period. It is like an endowment plan with the added advantage of liquidity.
In accordance with section 10(10D) of the Income Tax Act of 1961, the payout that the policyholder receives at the conclusion of this plan is entirely exempt from taxation, provided that the conditions outlined therein are met. This is over and above the tax benefit of Rs. 1, 50,000 that he/she is entitled to under section 80C of the Income Tax Act, 1961, on the premium paid for the term policy.
5. Taxation on Insurance Riders
Life insurance riders include the likes of Waiver of Premium Benefit rider, Family Income Benefit rider, Accidental Death Benefit rider, and many more. These are beneficial additions to the base life insurance plan that make the overall coverage more comprehensive when faced with unfavorable life scenarios. These add-on covers also offer tax benefits.
The premiums paid towards these riders are eligible for deduction under Section 80C of the Income Tax Act, 1961. Further, for riders like Critical Illness Benefit, one can also avail deduction under 80D on the premium being paid.
Be proactive about your investments for tax-saving purposes
The tax-saving period for both salaried and non-salaried taxpayers begins on April 1. Hence, it is advisable to start investing in the first quarter of the fiscal year rather than waiting till the end.
Life insurance is a sensible option for individuals seeking to secure their families financially while saving money on taxes. In the event of an accident or sudden demise, life insurance policies provide loved ones with adequate financial security. It is hence suggested that one considers long-term objectives when choosing an insurance plan.
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