Taxes are an unavoidable part of financial planning that leaves you perplexed. You might be convinced with the idea of paying taxes as a responsible citizen, but at the same time, you might feel the need to save taxes. The Indian government that poses the deadlines of paying taxes also gives you leverage with tax deductions and exemptions.
While when you talk of taxes, the most common and age-old method in practice is to save tax with life insurance. The premiums you pay are eligible for deductions under the Income Tax Act.
Facts of Life Insurance
- In 2020, the Life Insurance Council, the only government body of life insurance, issued 21.9 million new individual policies.
- Private insurers on the same segment issued 6.95 million policies in the same year.
- The life insurance industry is expected to increase at a CAGR of 5.3% between 2019 and 2023.
- India’s life insurance penetration was pegged at 3.2% compared to 1% of non-life insurance.
Why Do People Buy Life Insurance Policies?
A life insurance policy is the only way to recover financial strength in contingencies like death, disability, or diseases in humans. The money recovered can help you gain back the confidence to live life peacefully. Life insurance is a security you can create for yourself in the event of death or when you survive for long.
You can buy life insurance policies for these purposes:
- Create financial support for the family. A life insurance policy can ensure that the family has some financial support in the event of the policyholder’s death.
- Save money for the child’s education or their marriage.
- A life insurance policy can help you save money for the future to get a regular income after retirement.
- The policy helps you build security to have extra income when your earnings get reduced, and you look for a secondary source of income.
- Life insurance policies help you save taxes. Essentially people buy insurance policies as they have to plan for saving taxes.
Let us look further: how does life insurance save tax?
How does Life Insurance Save Tax?
The life insurance policy premium that you pay is eligible for tax deductions.
- If the premium paid is less than 10% of the sum assured in the policy and obtained after April 1, 2012, you can claim a deduction under Section 80C. If the coverage was obtained before April 1, 2012, the premium could not exceed 20% of the total guaranteed.
- If you bought a life insurance policy for a disabled family member or provided you have such a condition, you can save money on taxes by claiming a deduction under Section 80C if the premium paid is less than 15% of the sum assured. However, the handicap must be reported under Section 80U of the Income Tax (IT) Act, or the terminal condition must be listed under Section 80DDB.
- Another benefit of life insurance is that if the premium does not exceed 10% of the sum insured, the maturity amount paid on the policy is not taxed under Section 10D. Premiums over 10% of the sum assured are not eligible for this exemption.
Individuals, essentially taxpayers, buy life insurance policies and make investments to claim these deductions. The policy can be purchased for self, spouse, dependent parents, and children. The deductions allowed for every individual are different.
|Eligibility||Deduction under Section 80D|
|Health insurance for individual, spouse, children (below 60 years)||Up to Rs.25,000/-|
|For Individuals and parents both below 60 years||Up to Rs.50,000 (Rs.25K+Rs.25K)|
|For individuals below 60 years and senior citizens parents||Up to Rs.75,000 (Rs.25K+Rs.50K)|
|For Individuals and parents (both above 60 years)||Up to Rs.1,00,000 (Rs.50K+Rs.50K)|
What are Popular Life Insurance Policies that People Buy to Save Tax?
These are the popular tax saving life insurance policies that individuals can buy to save taxes:
1. Buy a Term Plan
Buy a term plan to save tax. A term plan is the purest life insurance policy that provides you life cover for a specified term. If anything unfortunate happens with the life insured during the policy term, the sum assured is paid to the nominee. Therefore, the term plan is the most affordable life insurance policy where you get high coverage with a low premium.
People who have loan liabilities or those who want to build financial security for the family in their absence
2. Buy a ULIP Plan
Individuals who look for intelligent tax benefits and investment options buy ULIPs. ULIP is a dual benefit life insurance policy that provides life covers and fund investment choices. Individuals choose an investment, and they can easily switch between funds. Depending on the risk absorption capacity, you can invest in ULIP.
3. Buy a Savings Plan
Those who dream of having a beautiful home, owning a car, or traveling abroad buy a savings plan. These life insurance policies help save money throughout life by paying a premium for the entire life.
Savings plans help to meet the financial requirements of individuals by making investments as per one’s risk appetite. If anything happens to you during the tenure of the savings plan, the dependent members will get the death benefit. Like other life insurance policies, savings plans fetch you tax benefits also.
4. Buy a Pension Plan
A pension plan, also called a retirement plan, pays the individuals when their active income stops. It is a tremendous financial support system that helps you afford daily expenses and any emergency. Pension plans help families in the absence of the policyholder. If you pass away during the policy tenure, the policy will help the dependents recover financially.
Factors to Consider Before Buying Life Insurance to Save Tax
These are the factors to consider before buying life insurance to save tax:
1. Amount of life cover you want
Tax deductions can be one reason to buy a life insurance policy. But the amount of a life cover is essential to consider.
2. Check the policy tenure
See whether you will afford the cover for the duration in terms of premium. For example, if you buy a pension plan and are 30 years old, you will need the insurance cover for 35 years. This way, you will get pension cover until 65 years of age.
3. The reason for purchasing the life insurance policy is the most important
Suppose you are not a risk-taker and you still buy a ULIP plan even when you can create financial security for your family with a term plan.
4. Check for the Claim Settlement Ratio (CSR) of the company
Though CSR does not affect the tax deductions benefits, checking the claim ratio makes you sure of purchasing the product from a reliable insurance company.
Buy tax-saving life insurance policies to claim a tax deduction and get the benefits of the policy. But before buying the life insurance policies, evaluate the tax liabilities based on your income bracket. If you are unaware of which products can reduce your tax liability, you can consult your tax advisor. For more information on tax deductions, read here.