You can predict and prepare for many aspects of your life. If you want to take a trip abroad but are on a tight budget, you can still plan something within your budget. Similarly, you can prepare for a wedding in your family because you already know your budget and accordingly know what to expect.
Still, there are a few things in life that you can’t anticipate with any degree of certainty. There’s no telling when a severe sickness, the loss of a loved one, or an accident can strike, and all three can significantly impact your financial situation.
A life insurance policy can help you be financially ready for these kinds of uncertainties.
What is life insurance?
A life insurance policy is recommended for all to ensure your family has a stable and comfortable life. It helps provide for your family if something unfortunate were to happen to you. Capital gains from the life insurance pay-out help your family build a safe and secure future, even in your absence. You could take a clue from a life insurance calculator online to determine an approximate coverage or corpus your family would need to fulfil all their needs comfortably.
Moreover, the provisions of sections 80C and 10D of the Income Tax Act have many life insurance tax benefits you can leverage. Please note that any tax benefit is subject to change as per the law that prevails.
Life insurance tax benefits
Under Section 80C, you can get a tax deduction of up to Rs 1.5 lakhs against the life insurance policy premiums. Section 10(10D) states that the death benefit or income on maturity is free of tax under certain terms and conditions.
So, if the insured person passes away, the sum of money paid to the nominee shall be exempted from tax. But when the policy matures, the income can be taxed at the marginal tax rate if it does not meet the qualifying criterion to receive life insurance tax benefits.
According to Section 80C, you can avail of a tax deduction on your life insurance premiums up to Rs.1,50,000. This deduction is applicable if the amount of premiums you pay in a financial year is not more than 20% of the sum assured amount of the policy. This only applies to life insurance policies bought before March 31, 2012.
For policies issued after April 1, 2012, the tax deduction is applicable only if the premium paid in a financial year is no more than 10% of the sum assured.
But if the sum assured is less than ten times the premium—for example, if you pay Rs.1 lakh as premium for Rs.5 lakh sum assured—you will get a deduction on the premium equal to up to 10% of the sum assured. In the example, you will only be able to deduct Rs.50,000, not Rs.1 lakh.
Under section 80C (5), if the policyholder gives up or surrenders his policy on his own or if the policy is terminated before the end of 2 years from the date of the commencement of the policy, the insured would not get any of the benefits on the premiums paid offered by section 80C of the Income Tax Act.
As per Section 80D, the premiums paid for a health-related insurance product, such as a critical illness rider, can also be used to claim tax deductions up to Rs 25,000, under certain terms and conditions. Thus, adding a critical illness insurance rider not only increases the level of protection but also provides additional tax benefits.
Important Note: Section 80C and 80D tax benefits are only applicable to those who have opted for the old tax regime. Individuals paying taxes under the new regime may not be able to access these tax benefits.
Conclusion
Finally, as you now know, there are many life insurance tax benefits you can take advantage of. Please consult a tax advisor for more details and get a better understanding of these benefits. Additionally, also check out a life insurance calculator to determine the adequate amount of coverage you need for your family. The right amount of premium can ultimately also help you save a good amount of tax.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.’
