Life Insurance Tax Benefit: What are Tax Saving Investments?

Life is uncertain, and a life insurance policy helps one ensure that their family’s future is financially secure in their absence.

Apart from protecting your family, you get life insurance tax exemption of the insurance premium paid. So, if you are looking for tax saving schemes, know that you can reduce your income with the help of deductions under sections 80 C, 80 D, etc., of the Income Tax Act. Let us explore income tax saving options with life insurance.

Can You Get Tax Benefits from Your Life Insurance Cover?

Whenever the financial year ends, there is one concern on most salaried people’s mind: Have I made wise tax saving investments and come up with a solid tax saving plan? There are multiple ways in which you can ensure that your hard-earned money doesn’t get unnecessarily eaten up by huge tax payments. But one of the safest and wisest ways to do this is to get tax benefits from your life insurance cover. So how exactly does your life insurance policy become a tax saving investment? Let’s find out.

How Can Your Life Insurance Policy Become a Tax Saving Plan?

Most of us know that under Section 80C of the Income Tax Act, premiums paid towards a life insurance policy qualify for a tax deduction. The maximum amount of deduction that can be claimed under Section 80C is Rs 1.5 lakhs for the current financial year. As a taxpayer, you need to opt for tax saving investments that will get you tax benefits and yet keep your money safe. So, life insurance becomes a viable option.

What are Some Life Insurance Tax Benefits Under the Different Sections of the Income Tax Act 1961?

Under Section 80C

As a taxpayer you can heave a sigh of relief as you don’t have to pay tax on Rs. 1.5 lakhs of your salary. Instead, you can simply deduct this amount from your taxable income. It is however important to know that this deduction is allowed only for certain expenses and investments. Life insurance premiums are one such expense. In addition, as an investor, you must also be made aware that the life insurance cover needs to be at least 10 times the annual premium that you pay to be eligible for tax benefits.

Under Section 80(D)

Another tax advantage of life insurance policies is that taxpayers can claim a deduction under section 80(D) of the Income Tax Act. When an individual purchases life insurance for himself, his spouse, his children, or his dependent parents, he is eligible to claim tax deductions. The below table explains age-wise deduction under section 80D.

Some essential points:

• The deduction is available for individuals and HUF.
• NRIs who pay income tax in India can also claim a deduction under section 80(D).
• Deduction under 80(D) is over and above the deduction claimed under 80(C).
• Contributions made to government health insurance schemes are eligible.
• Expenses on preventive health check-ups are also eligible.
• Medical expenses of senior citizens who do not have medical insurance are eligible.

Under Section 10(10D)

This section makes income on maturity tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium. However, if the sum assured is less than 10 times the premium, you will get a deduction on the premium up to 10% of the sum assured. Let me illustrate. Suppose you pay Rs. 1 lakh as premium for a sum assured of Rs. 5 lakhs. Your deduction will be ₹50,000 and not ₹1 lakh since ₹50,000 is 10% of ₹5 lakh.

Read more to know more about the tax saving instruments under sections 80C and 80CCD.

What is the TDS on the Insurance Policy?

The government has laid down rules for tax deduction at source from various incomes, and proceeds received from life insurance policies are also one of them. As per the rules, the insurer must deduct tax before paying the life insurance amount to the insured.
According to the income tax rules, income received from life insurance policies is subject to TDS after the premium payment is deducted.

• TDS of 5% must be deducted if the policy amount to be paid is more than ₹1 lakh (on or after September 2019), which is not exempt under 10(10D).
• The TDS is applicable even on the bonus amount paid to the policyholder.

After the TDS has been deducted, you can claim the deduction while filing the income tax return, which will reduce the tax liability.

What Happens in Case of Death or on Maturity?

In case of death, the nominee gets the sum assured and it remains tax-free. On maturity, if life insurance policy satisfies conditions mentioned in the Section 10(10D), maturity proceeds will be exempted from tax. if the life insurance policy doesn’t satisfy conditions, maturity proceeds will be taxable. On such policies, life insurance companies deduct 1% withholding tax. No withholding tax is applicable if aggregate of payment to policyholder should not be more than INR One Lakhs.

Are Life Insurance Limits Important for Tax-Saving Investments?

In all financial matters, it is better to go through the details carefully. This holds true for insurance policies as well. In the case of term plans, you may not find it critical to go through every detail since the sum assured is much larger than the premium paid. But when you’re considering life insurance as a means of tax saving investments, being aware of the insurance limit becomes important.

Eligibility Criteria to Claim Life Insurance Tax Benefits

The government of India has opened many doors for taxpayers to save their taxes and gain financial benefits while they secure their dependents with life insurance tax-saving options. Sections 80 (C), 80 (D), and 10 (10D) specifically allow deductions if specific eligibility criteria are met, as mentioned below:

• The policyholder must be an individual, his children, spouse, parents, or parents-in-law.
• The entity must be an individual or a Hindu Undivided Family.

How to Save Income Tax on Life Insurance Policy?

One of the benefits that policyholders look forward to is the tax advantage of life insurance. Here are some ways to save tax from a life insurance policy:

• When you purchase a policy, you can get entry benefits by way of deduction of premium under section 80(C).
• You can also save on the income earned if it meets the criteria specified under section 10(10D).
• If you switch from equity to debt, balanced funds, or vice versa, you are not taxed.

Get Smart and Be Aware of Great Tax-Saving Insurance

Taxpayers in India can take advantage of the various pathways provided by the government to reduce their taxes while also safeguarding themselves and their loved ones with life insurance. The following benefits are available when you buy a life insurance policy.

• Deduction under section 80C for specified expenses
• Deductions under section 80 D for the life insurance premium of self and dependents
• Tax-free income from a life insurance policy if the specified conditions are met.

To know more about Term Insurance browse the website for various Term Plans offered by PNB MetLife

Disclaimer: