Life insurance policies are useful tax planning tools as it provides tax benefits under various sections of the Income Tax Act (1961). There are multiple modes for tax saving, but life insurance still stands out as one of the most effective tax planning instruments.
Certain life insurance plans provide a dual benefit under which you not only save tax but also look at achieving your long-term financial goals and also get financial protection to secure the future of your loved ones.
Tax benefits offered under the Income Tax Act, 1961:
• Under Section 80C: You can claim a tax deduction of up to Rs 1.5 lakh from your taxable income on account of life insurance premium paid towards self, spouse or children.
• Section 10(10D): The returns received from life Insurance policies are tax-exempted under Section 10(10D) of the Income Tax Act (1961).
Below are the life insurance plans that are eligible for tax benefits under Section 80C and 10(10D) of the Income Tax Act, 1961.
ULIPs or Unit Linked Insurance Plans: Unit Linked Plans are market-linked plans that provide the policyholder an option to reap the benefits of the market’s performance and also get a life cover. When you choose to invest in ULIPs, you get tax benefits on the premium amount paid and your investment gets the potential to grow without being taxable. ULIPs are long-term investment plans where the minimum lock-in period is five years. The new age ULIP acts as a tax saving SIP that lets you invest in a disciplined and structured manner. ULIPs also let you invest in a variety of fund options ranging from debt to equity to a hybrid of the two. A policyholder can choose the fund he/she wishes to invest in as per his/her risk appetite, life stage, and the market’s performance. One can also switch between debt and equity as and when required. The new age ULIPs provides flexibility to the policyholder to make unlimited switches without any charges.
Term Plans: Term insurance plans are pure protection plans that solely cover risk against loss of life of the policyholder. This means it only provides death benefit and no maturity benefit will be provided if the policyholder outlives the policy tenure. The main purpose of a term insurance plan is to provide a financial cushion to the family members in the case of an unfortunate event of the demise of the policyholder during the policy term. All premiums paid towards a term insurance plan is also eligible for tax deduction under section 80C and the sum assured that is the death benefit which will be provided to the nominee will also be tax-exempted under section 10(10D) of the Income Tax Act.
Endowment Plans: Endowment plans are savings plans which also provide some amount of life cover. These plans provide upfront guaranteed benefit to the policyholder. They also provide loyalty additions which act as a bonus amount along with the savings accumulated. Endowment plans also provide tax benefits under both section 80C and 10(10D) of the Income Tax Act.
- Section 80CCC:
You can get tax benefits on premium paid up to Rs 1,50,000/- towards pension or retirement policies. However, if you surrender the plan, the pension amount received will be taxed as per the existing tax laws.
- Section 10(10A):
At the time of retirement, 1/3rd of the payment provided under the pension plan is also tax-free.
The life insurance plans that are eligible for tax benefits under Section 80CCC and Section 10(10A) are retirement plans and immediate annuity plans.
- Section 80D:
You can get tax benefits on premiums paid up to Rs 25,000 towards health insurance or critical illness insurance policies taken for yourself, your spouse, and your dependent children. The Tax benefit on premium paid can exceed up to Rs 50000 for senior citizens above the age of 60.
Now that you are aware of the various ways to save income tax through life insurance, don’t delay tax saving any further!