The Types of Insurance You Need to Consider for Tax-Saving

Come the taxpaying season and every taxpayer starts wishing they had invested in more tax-saving instruments. For the uninitiated, tax-saving instruments are essentially those financial units that allow one to enjoy tax benefits. When you are following the steps to file income tax returns, you can enter the details of these instruments to become eligible for the benefits.

One of the best ways to enjoy these tax benefits is to buy insurance policies. Not only are you saving a considerable amount of tax, but you are also financially protecting your loved ones against unfortunate circumstances.

How does tax-saving work with insurance?

Tax-saving with an insurance policy happens in two ways: deductions or exemptions. Deductions occur when your tax liability is reduced because you made certain premium payments mentioned under different sections of the Income Tax Act, 1961. Exemptions, on the other hand, occur when you receive money/returns/pay-outs from an insurance policy, and it is relieved from direct taxation.

Mostly, Section 80C, 80D, and 10(10D) are instrumental in tax-saving for insurance policyholders. One can also get a better understanding of the tax benefits under these sections with the help of an income tax calculator.

Insurance policies that help save tax 

Whole and term life insurance plans 

These two are pure life protection plans whose sole aim is to provide a life cover to your loved ones in the event of your demise. These policies are not concerned with investment schemes, returns, savings, and so on. While whole life cover provides coverage for as long as you live, term insurance coverage is available for a limited duration only.

They are useful as tax-saving instruments in the following ways:

  • The premiums you pay for your life insurance policy can be claimed as tax deductions for up to Rs 1.5 lakhs under Section 80C of the Act. For this deduction to be valid, the annual premium of the policy should not exceed 20% of the sum assured if the policy was bought before 1st April 2012. For policies issued after that, the premium should not exceed 10% of the sum assured.

  • The death benefit pay-out that your family receives from the life insurer is exempted from taxation. That means that your family will not have to pay any sort of tax on the life cover like they have to on other income sources.

  • Additionally, if you choose to terminate the policy during its duration, the surrender value pay-out you receive is also tax exempted.

A quick tip: Remember to add the relevant benefit under the right Section when you are going through the steps to file income tax returns.

Unit Linked Insurance Plans 

Also called as ULIPs, these plans allow you to receive life insurance coverage and attain returns with market-linked investments. One portion of your ULIP premiums goes towards creating the life insurance corpus while the other portion is invested in financial instruments that can gain returns. You can aim for equity funds, debt funds, or a balance of both. Similar to the income tax calculator, the ULIP calculator gives you an estimated figure of the returns based on your investment and choice of funds. Here is how tax-saving works with a ULIP:

  • The premiums that you pay towards a ULIP policy, including the part that is used for investment, offer tax benefits the same way and with the same terms and conditions as a term insurance policy.

  • The maturity proceeds, regular withdrawals, and even the surrender value pay-out are tax-free for a ULIP plan, as long as the lock-in period of 5 years is complete.

  • If you terminate the policy before the completion of five years, you can risk losing all the tax benefits you had incurred till then with the ULIP Plan.

Medical insurance plans 

These are general insurance plans that provide compensation when the policyholder is hospitalised, or suffers a health condition, as mentioned in the medical insurance policy. Section 80D allows for tax deductions up to Rs 25,000 against the premiums paid for a medical insurance policy for an individual under 60 years of age. For individuals aged over 60 years, the maximum deductions can be Rs 30,000.

You can enjoy Section 80D tax benefits with your life insurance policy by opting for a critical illness rider with your life plan.

Note: Do choose the right ITR form for you out of the many types of ITR presently available. Your tax benefits may be redundant if you submit the wrong ITR.

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