Save ₹ 46,800 in Taxes with the Help of Insurance

Jan 18, 2019 | 8 months ago | Read Time: 4 minutes | By iKnowledge Team

Minimize your tax burden by making tax-saving investments that get a deduction under Section 80C. Read the article to know how you can save  ₹ 46,800 in taxes with the help of insurance.

How you can save  ₹ 46,800 in taxes with the help of insurance?

With tax saving season approaching, the first question on everyone’s mind is what different provision can be availed to reduce the tax. The Indian Income Tax laws give a lot of opportunities to the tax payer to reduce his tax, either by making investments or for having spent money in certain areas.

One of the most popular sections for availing investment linked deductions is Section 80C. This gives a deduction up to  ₹ 1,50,000 for making investments in different tax saving instruments.

Some of the common tax saving instruments that get a deduction under Section 80C are:

  • Life insurance policies
  • Tax saving fixed deposit
  • Senior Citizen Saving Schemes (SCSS)
  • Public Provident Fund (PPF)
  • Employee Provident Fund (EPF)
  • Equity linked saving scheme (ELSS)
  • National Saving Certificate (NSC)
  • Sukanya Samriddhi Yojana

Apart from these, you get deductions for making some expenses, such as home loan repayments, payment of tuition fees for children etc.

Here is a table with the different investments and their rates of return:

Name of Instrument

Rate of Return

Description

Are returns taxable?

Life insurance:

 

Non market linked plans:

 

Market linked plans (ULIP)

 

Fixed

 

Market oriented

Life insurance policies provide a sum of money on payment of a yearly premium. Policies like endowment and ULIP have a maturity value as compared to term insurance which has only a death benefit.

 

These policies may be non market linked which means the returns are fixed, or market linked like Unit Linked Insurance Plans whose growth depends on the performance of the market

Any amount received on a life insurance policy is exempt if the premium meets the restrictions (10% of sum assured)

Tax saving fixed deposit

Between 6% to 8%

These are special 5 year fixed deposits offered by banks and the post office

Yearly interest is taxable

Senior Citizen Savings Scheme (SCSS)

8.7%

These are special schemes only for senior citizens

Yearly interest is taxable

Employee Provident Fund

8.55%

This fund is a form of retirement planning for salaried employees

Interest is exempt from tax

Public Provident Fund

8%

This fund is open to everyone. It is a form of retirement planning and corpus building

Interest is exempt from tax

Equity Linked Savings Scheme (ELSS)

Market oriented

These are tax saving mutual funds with a lock in period of 3 years

Gains on sale of mutual funds are taxable from 1st April 2018 if the gains exceed  ₹ 1,00,000

National Savings Certificate (NSC)

8%

It is a fixed income scheme operated by the Government of India. They are available at the post office

Yearly interest is taxable

Sukanya Samriddhi Yojana

8.5%

This is a special scheme for the girl child to build a corpus for her when she reaches 21 yea ₹ It involves making yearly contributions till the girl child is 15 years old and it matures when she is 21 years old.

Yearly income is exempt

The best way to financially secure your family and save tax is by investing in insurance. Section 80C allows a deduction of up to  ₹ 1,50,000 for premiums paid on life insurance policies. Let us examine this provision in detail.

Deduction for investment in life insurance:

The section provides a deduction for payment to a life insurance company to effect a life insurance plan. This insurance plan can be taken in the name of:

  • Taxpayer
  • Spouse
  • Children

Even a Hindu Undivided Family (HUF) can take an insurance policy in the name of any of its member. No deduction will be available if insurance premium is paid for any other person other than those mentioned above. Even if premium is paid for life insurance for parents, that is not allowed as a deduction.

Type of life insurance policy:

The Income Tax Act does not distinguish between the type of life insurance policy that the taxpayer invests in. He can invest in:

  • Moneyback or endowment policies
  • Child education or child protection plans
  • Single premium insurance plans
  • Term insurance plans
  • Market-linked Unit linked insurance plans
  • Any other life insurance plan

The deduction will be available to all types of insurance policies, thus allowing the taxpayer the flexibility to choose the life insurance policy that suits his requirements the best.

Quantum of Deduction:

The deduction allowed is actual premium paid or  ₹ 1,50,000 whichever is less. If the total premium paid for the year is less than  ₹ 1,50,000, then the total premium paid will be allowed as a deduction.

Condition for Deduction:

However, the deduction allowed is subject to a few conditions:

  • If the policy is issued before 1st April 2012, then the premium allowed as a deduction is restricted to 20% of the sum assured of the insurance policy.
  • If the policy is issued after 1st April 2012, then the premium allowed as a deduction is capped at 10% of the sum assured

If the premium paid for each life insurance policy does not meet this condition, then it will not be allowed as a deduction.

Surrender of insurance policies:

It is possible to surrender a life insurance policy before the term of the insurance policy is complete. In such a case, the Income Tax specifies a minimum period of holding for the insurance policies to avail the deduction.

  • For Non market linked policies: Minimum period of holding is 2 years
  • For market linked policies: Minimum period of holding is 5 years

If the insurance policy is surrendered before this period, then any deduction availed under Section 80C will be reversed and it will be treated as income for that particular year.

Amount of tax savings possible:

The amount of tax savings possible depends on the tax slab that the taxpayer belongs to. The tax savings also consider the savings in secondary and higher secondary education cess which is charged over and above the tax payable.

Thus the tax savings can be calculated using the formula:

Tax savings = Tax rate depending on slab * Maximum deduction amount

Total tax savings including cess = (Tax savings * 4% ) + Tax savings

Tax slab

Tax Rate

Deduction under Section 80C

Tax savings

2,50,000-5,00,000

5%

1,50,000

7,800

5,00,000 – 10,00,000

20%

1,50,000

31,200

10,00,000 and above

30%

1,50,000

46,800

       

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