Many people may not realise that insurance policies are also an important tax asset besides acting as a backup in case of rare events. Awareness of these benefits will assist you in optimising your insurance investments while minimising your tax bills.
In this blog post, let’s discuss what type of insurance policies can help you to minimise your taxes by analysing the main income tax sections on deductions and exemptions.
Important Income Tax Sections
Scroll down to learn the critical income tax sections so that you can identify the deductions and tax benefits:
Section 80C
The Income Tax Act 1961 has a section known as Section 80C, which provides individuals with deductions on various expenditures, including premiums paid on a life insurance policy.
- Deduction Limit: As per Section 80C, an individual can get an amount that does not exceed ₹ 1. 5 lakh for the financial year on the premium paid for the life insurance policies.
- Eligible Policies: These have to be in the name of the taxpayer, spouse, or children.
- Condition: The premium must be at most 10% of the sum assured.
Section 80CCC
Section 80CCC enables allowance for payment made to certain pension funds.
- Deduction Limit: The contributions to the pension fund are allowed as a deduction to an extent of ₹ 1. 5 lakh.
- Eligible Policies: This includes amounts paid to pension schemes as provided for by insurance firms.
- Note: The aggregate amount for sections 80C, 80CCC, and 80CCD(1) is ₹1. 5 lakh.
Section 80CCE
Section 80CCE prescribes the overall ceiling for deduction under sections 80C, 80CCC, and 80CCD (1).
- Combined Deduction: Total deduction allowed under sections 80C, 80CCC, and 80CCD(1) is limited to ₹ 1. 5 lakh.
- Simplification: This section is useful for deciphering the total maximum deduction one can claim.
Section 80D
Section 80D allows deductions for the premium payable concerning health insurance policies.
- Deduction Limit: You can deduct up to ₹25,000 from your taxable amount by contributing health insurance premiums for yourself, your spouse, or your children. If you pay your parents’ premiums, an additional ₹ 25,000 is offered. In case your parents are senior citizens, the limit is ₹ 50,000.
- Preventive Health Check-ups: Further ₹5,000 can be claimed regarding expenditure on preventive health check-ups subject to the overall limit.
- Condition: The policy must be in the name of the taxpayer or the spouse, children, or parents of the taxpayer.
Section 10(10D)
Section 10(10D) concerns the tax aspect of the maturity amount received on life insurance policies.
- Tax Exemption: The sum assured plus any bonus received on maturity or surrender of the life insurance policy, including the death benefit, is tax-free.
- Condition: The premium paid should be at most 10 % of the sum assured.
Section 10(10A)
Section 10(10A) deals with the tax exemption for pension income.
- Exemption on Commutation: Any commuted pension received is eligible for tax exemption under given conditions.
- Eligible Pensions: This consists of pensions derived from a recognised provident fund, an approved superannuation fund, or received under a policy of assurance.
- Conditions: A commuted pension is also exempt from tax if the commutation is in terms of the rules of the pension fund or scheme.
Benefits Paid Under Life and Health Insurance Policies
Life insurance policies have several advantages, guaranteeing your family’s financial security. Here are some key points regarding benefits paid under life insurance policies:
- Death Benefit: The main role of life insurance is to pay the insured amount (known also as the death benefit) to the nominated individuals after the insured’s death. This amount ensures that your family is financially sorted out through funeral expenses, outstanding debts, and other bills.
- Health Coverage: Health insurance policies cover the cost of medical treatments, hospital stays, surgeries, and other healthcare expenses. This helps to reduce the financial burden during medical emergencies and ensures access to quality healthcare.
- Tax Benefits: The amount paid towards the premium for life and health insurance policies can be claimed as tax deductions under Section 80C and 80D of the Income Tax Act, respectively. The sum assured paid at the end of the life insurance policy term is also exempt from tax under Section 10(10D) of the Income Tax Act.
- Riders and Additional Benefits: Riders can add more coverage and bring extra financial security. Riders may include critical illness coverage, maternity, and hospital cash benefits for health insurance. Life insurance may include accidental death benefits, a critical illness rider, and a waiver of premium rider.
- Investment Component: With ULIP (Unit Linked Insurance Plan), one can invest in either pure equity or debt funds or a blend of the two products. The returns will depend on the markets they have ventured in.
- Savings and Wealth Accumulation: At maturity, one gets back the total savings, and incentives, if any, are given.
- Loan Against Policy: The amount one borrows is normally a percentage of the policy’s surrender value.
Insurance policies are an important means of financial risk management associated with great tax savings. Appreciating the sections of the Income Tax Act that create these opportunities will help you enhance the efficacy of your insurance investments.