How to Save Income Tax with Insurance

Nov 01, 2018 | 1 year ago | Read Time: 4 minutes | By Manan Vyas

Insurance is a good option to protect yourself and your family members against uncertainties that may arise in the future. Insurance is also useful in the present, as it can help you save tax every year. With the tax savings, you can offset any financial challenges that you may experience when paying the premiums on your insurance policy. Tax savings are an essential part of tax planning and it can be achieved with insurance. Tax benefits are available on a wide variety of insurance plans, making it easier for you to derive the associated financial gains. To help you make informed decisions, here’s a quick guide on how to save income tax with insurance.

  1. Saving tax with Life Insurance:

In case of life insurance such as unit-linked insurance plans (ULIPs) and Term Insurance Plan, tax benefits are available on the premium paid under Section 80C. This is applicable to both individuals and Hindu Undivided Family (HUF). Tax benefits are also available to the nominee on payouts/bonus received as death benefit. Any payout received by the insured upon the maturity of a life insurance plan is also eligible for tax benefits. These tax benefits on the payouts can be availed under Section 10 (10D).  

Tax deduction on premium paid for a life insurance policy

You can claim tax benefits on premiums paid to maintain a life insurance policy of yourself (assesse), your spouse or your dependent children. The maximum tax exemption under Section 80C is Rs 1.5 lakh per annum. The actual tax benefit can vary depending on the time when the life insurance policy was taken. Here are some important dates to keep in mind:

  • March 31, 2012: If the life insurance policy is issued on or before March 31, 2012, tax benefits will be the total premium paid annually or 20 percent of the sum assured, whichever is less.
  • April 1, 2012: If the life insurance policy is issued on or after April 1, 2012, tax benefits will be total premium paid annually or 10 percent of the sum assured, whichever is less.
  • April 1, 2013: In case of policies issued on or after April 1, 2013 in the name of an individual with disability or severe disability, as mentioned in Section 80U, or in the name of an individual with specific diseases mentioned in Section 80DDB, the tax benefit will be the total premium paid annually or 15 percent of the sum assured, whichever is less.

Tax deduction on payouts received on a life insurance policy

This tax benefit comes under Section 10 (10D) and is available to the nominee in case of death of the insured. It can also be available to the insured upon maturity of the policy. However, the tax benefits under Section 10 (10D) are not available under the following scenarios.

  • In case of payout received as per sub-section (3) of section 80DD or sub-section (3) of section 80DDA.
  • In case the payout is part of a Keyman Insurance Policy.
  • For policies issued between April 1, 2003 and March 31, 2012, the premium paid in any year is more than 20 percent of the sum assured.
  • For policies issued on or after April 1, 2012, the premium paid in any year is more than 10 percent of the sum assured.
  1. Saving tax with Health Insurance:

Tax benefits for premiums paid for health insurance is available under Section 80D. Health insurance can be a part of life insurance policy or it can be an entirely different policy. Health insurance covers preventive health checkups, illnesses, doctor consultation fees, cost of medicines and surgery, expenses on stay in hospital, etc. Under Section 80D, you can claim deduction for premiums paid for health insurance policies of yourself (assesse), your spouse, your dependent children and your parents. Here are some important things you should know about tax benefits available with health insurance.

  • Max deduction allowed is up to Rs 25,000 for premiums paid on health insurance of yourself, your spouse and your dependent children.
  • An additional deduction of up to Rs 25,000 is allowed in case of premiums paid on health insurance of parents (dependent or not-dependent).
  • In case of premium paid on health insurance of a senior citizen (age 60 or more), the deduction allowed will be up to Rs 30,000.
  • Saving tax with Retirement/pension/annuity plans:

These are different from life insurance, as they cater to the needs of the individual after their retirement. Tax benefits on amount contributed towards these plans are available under Section 80CCC and 80CCD (1). The max deduction under Section 80CCC is Rs 1 lakh. These Sections are part of Section 80C and the total deduction available under Section 80C, 80CCC & 80CCD (1) does not exceed Rs 1,50,000. Tax benefits are also available on payouts received under such plans. 1/3rd of the payout received on maturity is tax-free and the remaining 2/3rd is taxed at the marginal tax rate.

You need to choose an insurance plan that can adequately cover your future risks without compromising your present lifestyle. If you choose a high amount of sum assured, your premiums will also be high. This can impact your existing budget. Inversely, if you choose a low sum assured, it may not be adequate to cover your future financial risks, even though the premium may be less. You have to essentially balance the risks and the premium, so that you can provide for your existing needs and secure your financial future. You can use online tools such as income tax calculator, life insurance calculator, term premium calculator, and retirement plan calculator to understand which insurance plan is most appropriate for you.


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