Tax Planning

Life Insurance as a Tax Saving Tool

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Raj and his dad were having breakfast; Raj then asked his dad a question, “Why do you always prefer to invest in life insurance?”

His dad replied, “It’s because life insurance can help in fulfilling two objectives financial security for the family and tax saving.”

Raj then interrupted, “But isn’t it too early to start tax planning?”

His dad patiently replied, “The best time to start tax planning is always at the beginning of a financial year when you have a clear idea of how much you have earned during the previous year. Unfortunately, most of us land up investing in haste without evaluating various tax saving products and their features during the last quarter of the financial year. So the time is now to review your tax incidence for the year and plan your investment in tax saving tools.

If you look at the tax saving financial products available in the market, life insurance is one of the most effective ones because it not only provides financial protection for your loved ones but it also goes a step ahead to offer a host of tax benefits. You can avail an exemption of up to Rs 150,000 under Section 80C of the Income Tax Act, 1961 towards premium paid on life insurance policies. This also includes premium paid by you for life insurance for your spouse or your child. Any yearly income received by life insurance in the form of bonus and even the lump sum amount at the end of policy tenure are also tax exempted in accordance to section 10(10D) of Income Tax Act, 1961.

You can purchase life insurance in the form of a term plan, endowment plans, whole life plan, ULIP or as a pension plan. Of these, term plans are pure protection plans which solely provide life cover but others are a mix of life cover and savings. However, for tax saving purposes, all are equally beneficial as the application of tax laws are the same for all life insurance plans.

Retirement or pensions plans are slightly different from other life insurance plans in the way the investment and payout are structured. Pension plan has two parts — accumulation and payout or withdrawal. The policy works in a way that you pay premiums till the maturity date following which you are entitled to receive one-third as a lump sum payout and rest is paid out as regular pension depending on the pension option you have opted for. Tax benefits can be availed during the accumulation phase, i.e. for the premium paid each year. You can avail deduction under section 80CCC up to Rs 1.5 Lakh.

In the withdrawal phase, while one-third of the lump sum payout is tax free, the remaining amount which is paid as a regular pension is defined as income for that year.

Tax benefits on riders

There are various riders or additional benefits that can be added to a life insurance plan, for a nominal cost. Such riders include critical illness, waiver of premium, accidental total and permanent disability insurance. These riders offer tax benefits as well.

Any additional premium paid for rider add-ons are eligible for tax deduction in line with life and health covers. Under health cover, you can claim tax benefit under Section 80D up to Rs 25,000 for yourself, spouse and children. An additional premium up to Rs 30,000 for medical cover of parents can be claimed for tax deduction if the parents are senior citizens.

The rider that you opt for will determine the nature of tax benefit.

For example, if you choose a critical illness rider then the relevant section for tax benefit will be 80D.

Meeting the Income Tax Act requirement

Before you buy insurance, you should also analyse if the cover being provided is in accordance with exemptions/deductions available under the Income Tax Act.

While the primary objective of life insurance is protection, it is also a great tool for tax saving. It is important to be aware of all the features and benefits from a tax-saving perspective to gain maximum advantage.”

After listening to his Dad, Raj was convinced why life insurance is a great tax saving tool.

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