While having a life insurance policy can be effective in securing the financial well being of your family, it can also be an excellent option to save income tax. Read on to know various ways of saving taxes through life insurance.
The Covid-19 pandemic and the deadly second wave has once again brutally demonstrated the uncertainties of life. Therefore, having proper coverage in the form of life insurance is more important than ever.
Adequate life insurance ensures that your dependents and loved ones do not have to compromise their living standards when you are no longer around. Furthermore, with proper planning and knowledge, life insurance can be one of the best tax saving options that can help you save a good amount of tax every year.
Income tax Planning With Life Insurance
You can keep getting tax savings benefits throughout your investment cycle in a life insurance policy.
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Buying Phase
You will be paying a premium every year for certain tenure on buying an insurance plan. You can claim tax benefits on the premium paid under sections 80C and 80CCC.
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Accumulation Phase
Your investment corpus can compound significantly, if you stay invested for a long duration. You don’t have to pay any taxes on your wealth as long as it stays invested in a life insurance plan.
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Payout Phase
You can claim income tax benefits on the amount received on maturity as well, subject to certain terms and conditions.
Various Income Tax Benefits Offered on Life Insurance Under The Income Tax Act, 1961
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Section 80C
Under this section, you can claim an income tax deduction from your taxable income up to Rs 1.5 lakh in a financial year. You can claim this exemption against the premium paid toward life insurance for yourself, your spouse or your children.
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Section 80CCC
The amount received as sum assured, along with any bonus, paid on maturity, surrender of the policy, or on the policyholder’s death, can be exempted from any tax liabilities under certain conditions.
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Section 10 (10D)
The amount paid towards the premium of retirement or pension plans in a year is exempted from income tax under this section. However, you should remember that-
- A maximum of Rs 1.5 lakh paid as a premium in a financial year is exempted. Any more amount toward premium payment will be taxed as usual.
- The pension/annuity received on prematurely surrendering the plan will attract income tax as per the existing laws.
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Section 10 (10A)
Any accumulated pension, also known as a commuted pension, received by a government employee in place of a monthly pension, is fully exempt from income tax.
Note that all the benefits mentioned above are available under the old tax regime.
While you can effectively use life insurance for getting tax benefits, you should refrain from looking at it solely as a tax planning tool. Instead, consider life insurance as a protective safety net necessary for securing your family’s future with an add-on advantage of income tax benefits.
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