Insurance policies serve as a financial cushion and can also act as an avenue for significant tax saving. Certain types of insurance policies may help you bring in substantial tax saves, whether you are creating plans for emergencies concerning medical expenses, securing the future of your familiars, or retirement. In this article, we’ll show you how to use insurance policies to maximise tax efficiency while meeting all your savings objectives.
Tax Benefits of Insurance
The Income Tax Act in India encourages individuals to buy insurance by providing multiple provisions. So, the benefits of financial security lower the taxable income. These would be such types of insurance policies which, when used, could fetch in additional tax advantages.
1. Insure Yourself and Save Tax
Life insurance serves a dual purpose: it provides financial security to the policyholder’s family in the unfortunate event of their demise and offers certain tax benefits, provided you opt for the old tax regime. Under the old tax regime, the following benefits are available:
Section 80C*: The premiums paid for life insurance policies are eligible for deduction, up to a maximum limit of ₹1.5 lakhs per annum. This deduction applies to policies taken for yourself, your spouse, or your children.
If the premium does not exceed 10% of the sum assured, the maturity proceeds along with bonuses can be claimed as exempt from tax as per Section 10(10D)*. With such exemptions, it adds to the protective benefits that make life insurance a wiser investment.
Tax Tip: For maximum tax benefits, make sure to keep the policy annual premium within the prescribed limits of sum assured.
2. Protecting Your Health and Your Wealth
Health or medical insurance protects one from the financial impact of a medical emergency.
The following are some desirable tax benefits arising under Section 80D*:
Deductions up to ₹25,000 are available for premiums paid for yourself, your spouse, and your dependent children.
If you’re paying premiums for your parents, an additional deduction of ₹25,000 is allowed (₹50,000 if they are senior citizens).
Preventive health check-ups are also allowed as a deduction up to ₹5,000 within the overall limit.
Tax Tip: If you and your parents are above 60, you can claim a combined deduction of up to ₹1 lakh under Section 80D*.
3. Investment with Insurance
Unit Linked Insurance Plans (ULIPs) provide two benefits: insurance coverage and investment growth.
They have tax benefits:
Section 80C*: Premiums paid towards ULIPs qualify for deductions that reduce your tax liability.
Section 10(10D)*: Maturity proceeds are tax-exempt, but only if the premiums do not exceed 10% of the sum assured.
What makes ULIPs so unique is that they are tax-free on LTCG. It can be an excellent investment option.
Tax Tip: While designing a long-term financial plan to achieve investments and focus on tax benefits, utilize Unit Linked Insurance Policies, also known as ULIPs.
4. Maximising Tax Relief in Retirement Planning
Pension or annuity plans aim at continuous income after retirement. These plans also give tax benefits:
Section 80CCC: The yearly contributions pay for the pension plans up to ₹1.5 lakh are allowed as a deduction.
Section 10(10A): A commuted pension which would be a lump sum withdrawal is exempted from tax, subject to conditions.
Tax Tip: Combine a pension plan with other retirement tools like the National Pension System (NPS) to achieve comprehensive tax efficiency.
Maximise Tax Benefits through Insurance
Now that we’ve established the tax break offered by specific insurance products, here are some tips to ensure you get maximum benefits from them:
- Select the Right Policies: Analyse your financial objectives and choose policies that fit them all—life, health, or retirement protection.
- Consider Investment Diversification: Be sure to acquire various kinds of insurance products to be able to maximise your financial security and tax savings in one fell swoop.
- Pay Yearly Premiums: Try to pay an annual premium instead of a quarterly amount, as the annual payment will not attract any administrative charges, thus ensuring greater benefits.
- Keep Information Available: Keep all the papers concerning the policy convenient enough for easy access while claiming tax benefits.
- Keep Abreast of Tax Laws: Tax laws change consistently. Keep reviewing and updating yourself to make maximum use of even the latest features.
Common Mistakes to Avoid
- Over-insuring: Buying policies with high premiums that are hard on your budget.
- Overstepping of the Conditions of the Policy: If lock-in periods or sum assurances are not complied with minimum requirements, tax exemptions may be denied.
- Ignoring the Renewal of the Policy: Not renewing the policy on time exposes the policyholder to losing the insurance coverage and any tax benefits.
Insurance policies are an excellent means of saving for the future by reducing tax liabilities. Sections 80C, 80D, and so on have plenty of tax benefits to save significantly while securing one’s family, health, and retirement. But do note that the tax benefits under Sections 80C, 80D, and 80CCC are available only if you stick with the old tax regime. If you’ve opted for the new tax regime (introduced under Section 115BAC), you won’t be able to claim these deductions and exemptions. Remember, tax laws can change, and the best tax-saving approach depends on your unique financial situation. For personalised advice, it’s always a smart idea to check in with a qualified tax expert or financial advisor. This approach ensures that you’re protecting yourself and enhancing your financial efficiency. Start today and let your insurance policies work harder for you.
