It is commonly believed that the start of the financial year is the correct time to start tax planning; however, it is the JFM quarter when most salaried individuals undertake tax-planning. An activity which should be given great thought to is unfortunately carried out in a hurried manner, and most people invest in tax-saving products without evaluating their features and understanding their benefits. When comparing different instruments, it is always advisable to choose an option that offers the combined benefits of wealth protection, strategic flexibility, value appreciation, and tax savings.
One of the many favourite tax-saving instruments individuals opt for is insurance. Although an insurance policy’s main objective is to provide financial protection for an individual in the face of uncertainties, it also acts as a tax shelter. Some of the preferred life insurance products include: term plans, money back, whole life and ULIPs (unit linked insurance plans). Term plans give you pure protection whereas others are a mix of insurance and investment. However, for the purpose of tax, all these are treated equally by the Income Tax department. All types of life insurance plans qualify for tax benefits on entry and redemption.
Let’s understand the tax benefits offered by life insurance products:
· One can avail a tax benefit by way of deduction towards premium paid on life insurance policies up to Rs. 150,000 under Section 80C of the Income Tax Act, 1961. This also includes premium paid by the individual for life insurance for his/her spouse or child
· If one has taken any pension/annuity plan, he/she will be allowed a deduction up to Rs. 1 lakh. On maturity of the accumulated amount, 2/3rd of the income is taxable, while the remaining 1/3rd is tax free.
· If the nominee claims the insurance money in case of the life insured’s unfortunate demise, the claim amount is also tax deductible under Sec 10D. The same benefit is extended to Unit Linked Insurance Plans (ULIPs) and retirement plans under Section 80CCC.
· Unlike other savings instrument, life insurance has an additional EEE (Exempt Exempt Exempt) benefit – the amount one invests, the amount that one’s investment earns and the amount that one finally receives is all exempted from income tax
However, one must keep the below points in mind before choosing life insurance as a tax-saving instrument:
· A life insurance policy qualifies for a tax deduction (in case policy is issued after April 1, 2012) only if the premium does not exceed 10% of sum assured. For policies issued before this date, premium should not have exceeded 20% of the sum assured
· If the policyholder surrenders the insurance policy before 2 years and 5 years respectively (for traditional and ULIP policies respectively), the tax deduction will also get reversed
Insurance is a great means to save tax. However, one must be aware of the latest tax changes and rules and be mindful of the same while purchasing insurance, in order to get the best tax benefits that are available on such products.