It is no secret that people are always on the lookout for new ways to save taxes. While tax planning may sound too complicated, you will be delighted to know that there are many simple ways to save taxes. Life insurance is among the most taxing saving financial instruments available.
As it is, life insurance is an imperative component of an individual’s financial portfolio and the tax benefits of life insurance are like the icing on the cake.As per the Income Tax Act, life insurance policies are eligible for tax exemption under the section 80 C.
Whether you choose a term insurance or a whole life policy, you can avail generous tax benefits just the same. Read on to explore the details of life insurance tax benefits.
Tax Benefits under the Section 80C
Under the section 80C of the income tax, the premium paid towards a life insurance policy is eligible for tax deductions up to Rs.1.5 Lacs each year. Therefore, you can deduct the amount equivalent to your yearly life insurance premium from your gross taxable income.
However, there are several clauses governing the deduction under section 80C such as:-
- Tax deductions can only be availed by an individual or an HUF (Hindu Undivided Family).
- The life insurance policy should be purchased an insurance company recognized by the Insurance Regulatory and Development Authority of India.
- The premium paid towards life insurance of parents, in-laws or siblings is not eligible for tax benefits.
- Tax deductions can be claimed only if the insured person is self, spouse or kids.
- The premium should be paid in the same financial year for which tax exemptions are sought.
- You can claim one or more investment options up to Rs 1.5 Lacs each year.
- If you have other investments under the section 80CCC and Section 80CCD, they will be considered under the section 80C.
Tax Benefits Under the Section 10 D
Under the section 10 D, the sum assured as well as the bonus paid on the maturity of a life insurance policy is tax-free. This exemption is applicable on the death of the policyholder or the surrender of the policy. However, the policy proceeds are liable to taxation under the following circumstances:-
- If the premium paid is more than 20% of the total amount insured, the policy is taxable in the hands of the policyholder or the insured.
- Life insurance policy dated after 1st April 2003 and on or before 31st March 2012.
- In case the policyholder suffers from any critical illness (listed under Section 80DDB) or disability (mentioned under Section 80U), the limit is 15%.
- As per 194DA of the Indian Income Tax Act, the amount received by the policyholder for an insurance policy is subjected to tax deduction at source or TDS if the stipulated amount is not exempted under Section 10(D).
As you can see, life insurance policies offer amazing tax benefits. However, tax benefits should not be the sole purpose of buying a life insurance policy.
Therefore before choosing a life insurance policy, consider the key features and benefits of the policy first and then check the tax bracket under which the policy is eligible for exemptions.