Life insurance is a smart and easy way to secure your family’s future. But apart from the security and assurance, it also provides several added benefits. For example, life insurance is one of the most optimal ways to decrease tax burden. Most Indians buy life insurance to save taxes.
While one should first understand their insurance needs before purchasing life insurance rather than selecting it as a last-minute tax-saving instrument, the tax benefits are an added incentive. So, how does life insurance help you save taxes?
How to Save Income Tax with Life Insurance?
Considering your life insurance policy category, you can save income tax at different policy stages, including:
Stage 1: Entry Advantage
An individual can claim tax deductions on the premiums paid for the plan under Section 80C (Life Insurance), Section 80 CCC (Pension policy), and Section 80D (health insurance policy).
Stage 2: Earnings Advantage
During this stage, your investments keep growing. There is no taxation liability.
Stage 3: Exclusive Switching Advantage
If you have selected a policy with both insurance and investment benefit, you can swap between debt, equity funds, and balanced funds. So, investment switching is not taxable.
Stage 4: Exit Advantage
The maturity benefit you will get at the end of the plan is entirely tax-free under Section 10(10D) of the IT Act.
What are the Various Sections Under Which You Can Claim Tax Deductions?
Let us take a look-
- SECTION 80C
Under Section 80C of the Income Tax Act, the premium paid for a whole life insurance or ULIP is entitled for tax deductions of up to Rs. 1.5 lakhs in a year. Nevertheless, the premium paid in the year should not be exceed 10% of the assured sum. Hence, if your life insurance plan’s assured sum is Rs. 10 lakhs, the premium paid in a year must not be more than Rs. 1 lakh.
- SECTION 10(10D):
The returns you get from Life Insurance plans like an Endowment or Money Back Plan is entirely tax-free.
- SECTION 80CCC
If you have bought an annuity or pension plan, premiums of up to Rs. 1.5 lakhs paid in a financial year are liable for tax deductions under Section 80CCC of the IT Act. This rule came into effect in 2016-17. Nevertheless, the deductions under Section 80CCC do not supersede Section 80C. The combined deductions under both are up to Rs. 1.5 lakhs.
- SECTION 10(10A):
In this section, your insurance company provides one-third of the payment as part of the Pension policy. You get the payment at the time of retirement. In this stage, the payments are excused from tax under Section 10 (10A) of the IT act.
- SECTION 80D
Section 80D go hand in hand with health insurance. Nevertheless, if your life insurance policy has riders or add-ons like surgical care, critical illness, and hospitalisation charges, you can take advantage of this. In this section, you may claim deductions of up to Rs. 25,000 in a year. Still, if the premiums are paid for the life insurance plan bought for a senior citizen, the deduction limit is up to Rs. 30,000.
- SECTION 80CCE:
In this Section, the maximum aggregate you claim under Section 80C, 80CCC, and 80 CC(D) should not be more than Rs.1,50,000 in a year. The tax deductions are done from the total gross income for the government pension schemes’ contributions.
Are the deductions available only for a policy purchased for self?
No. You can claim tax deductions under these sections for life insurance plans bought for yourself, your spouse, and even your children. In the scenario of Section 80D, even the premiums paid towards a policy bought for your dependent or independent parents are liable for tax deductions.
You can calculate your income tax savings using a Income Tax Calculator. This way you can save income tax and get clarity about your savings.