How insurance helps you save tax

Sep 11, 2017 | 1 year ago | Read Time: 4 minutes | By iKnowledge Team

Finding a ticket for your favorite exotic destination could get difficult, especially during peak season. Even if you get the tickets for the vacation, they would be expensive. But what if you get a ticket that comes with free food vouchers worth Rs. 10,000.

Well, we’re not sure if travel agents offer a two-in-one deal, but insurers can.

A life insurance gets you a cheap ticket to fulfilling your life goals along with a free tax voucher. Meaning: It helps you achieve your goals in life as well as save taxes.

For example, a Term life insurance costs you a few thousand rupees. But in can offer lakhs and crores of rupees in case something happens to you. This money can then be productively used for your child’s education, your family’s financial security, etc. There are various other life insurance policies too that suit other goals like post-retirement income.

Now, let’s move on to taxes.

Insurance and tax-saving

How insurance helps you save tax – ppt

Taxes can be difficult to understand. Even Albert Einstein is reported to have said that income tax was the hardest concept to understand.

That said, the concept of saving taxes using insurance is comparatively easier. It works like this:

– You buy a life insurance policy by paying a premium.
– This premium amount is deducted from your income while calculating tax.
– You can deduct as much as Rs. 1.5 lakh by buying life insurance.
– Thus, your income reduces by Rs. 1.5 lakh in the eyes of the taxman.
– Next, calculate tax as a percentage of your income.
– With a lower income, your tax reduces too.
– By buying a life insurance of up to Rs. 1.5 lakh, you can save as much as Rs. 45,000 (30% of Rs. 1.5 lakh)

But that’s not all. Insurance has many tax-saving features. Let’s have a look:

Saving taxes using deductions under the most common section—80C

Want to save tax? Head to Section 80C of the Income Tax Act. This is where all the tax-saving investment options are listed.

Do you have a home loan? The interest that you pay can utilize a significant portion of your exemption limit of Rs. 1.5 lakh. Also, if you have children, you could claim deductions using their tuition fees.

However, if you need to reach the Rs. 1.5-lakh target, you also have a multi-purpose option—life insurance. You can even have a mix of insurance policies to meet the Rs. 1.5-lakh target.

Just make sure that the premium amount is not more than 10% of the insurance cover. For example, let’s say you get a life insurance cover of Rs 10 lakh, your premium should not exceed 10%, i.e, Rs 1 lakh. Otherwise, it would not be eligible for tax-saving.

Even your investments through insurance get you tax benefits

Unit-linked insurance plan, or ULIP, attempts to bring you the best of both worlds—insurance and market-linked investments.

You pay a single premium. Part of it is used as your term insurance premium. The other part is invested into the equity or the debt market.

But from the taxman’s point of view, it’s a single premium. So, the whole amount can be used to claim tax deductions under section 80C.

Ensure a proper health care while saving taxes using section 80D

The government wants you to insure your life AND health. Both are equally essential to you. After all, even a simple health issue can drain your money completely. Only an adequate health insurance can halt this drain.

And this is why the government offers tax benefits on medical insurance too.

Whatever premium you pay on your health insurance or even a medical add-on on your life insurance, you can reduce it from your taxable income. The section 80D of the IT Act allows you a deduction of up to Rs. 25,000. But if you are over 60 years of age, you can deduct more—up to Rs. 30,000.

Non-earning family members and your entire family as an entity can help you save taxes.

Not everybody buys insurance on their own. You can buy insurance for your dependent parents, a non-working spouse or even your child. And when you do so, you can claim tax deductions on their behalf too.

So for example, you pay the premium for your family as below:

– Life insurance

o For self: Rs 45,000
o For spouse: Rs 40,000
o For child: Rs 15,000
o For elderly parents: Rs 50,000

– Health insurance

o For a family of three: Rs 25,000
o For dependent parents: Rs 40,000

You could thus claim a total deduction of Rs 1.5 lakh for life insurance under Section 80C and Rs 55,000 (25,000 + 30,000) for health insurance under Section 80D.

Did you know? The return from your insurance is also tax free

While many of us know the answer to the question, this is still one of the most commonly asked questions. “Are there any taxes on the payments you receive from the insurance?”

Let’s reassure you: No. The money you receive from insurers, be it the sum assured or a bonus, is tax-free. This is irrespective of when the money is paid—on maturity, surrender or policy or during a death claim.

The only payout that could attract tax is the money you earn from any market-linked investments through ULIPs.

However, equity-based investments attract zero tax if you sell it after 1 year. Only the debt-based investments can attract a Capital Gains tax depending on how long you held it.

Bottom line

When you get your salary, you would see that there are certain deductions. First is the professional tax. Then you can see the provident fund contributions. Over and above this, you can also use your life and medical insurance premia to claim an additional deduction. This can help you save a lot of taxes!

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