10 Things to Know About Insurance and Tax Saving
Income tax is paid each year by any eligible Indian citizen with a regular income. The amount is paid based on a percentage of taxation on one’s annual earnings based on what income tax slab one falls into. Life insurance and health insurance are popular investment options for their tax-saving benefits. However, there are many facets and clauses to these taxation benefits. Here are ten things to know about your insurance policy as a tax-saving investment.
1. Tax Saving Insurance Options
The complete range of insurance options with tax benefits are whole life insurance policies, term life insurance policies, health insurance, retirement plans and Unit-Linked Insurance Plans (ULIPs). Each of these fall partially similar and some different sections of the Income Tax Act.
2. Features of the 80C (80CCC, 80CCE) Tax Deduction
As per the 80C deduction, you can claim a tax deduction on your taxable income on up to Rs 1.5 lakh worth of premiums paid towards your life insurance for yourself, your spouse or your children. As per 80CCC, you can get tax benefits on premium paid up to Rs 1,50,000 towards pension/retirement policies. However, in case you choose to surrender the plan, the pension/annuity received by you will be taxed in accordance with the prevailing tax laws. As per 80CCE, the total limit you can get tax deducted from your taxable income through Sections 80C, 80CCC, and 80CCD (1) is Rs 1.5 lakh.
3. Features of 80D Deduction
On premiums paid online towards your health policy, you also get tax benefits as per Section 80D, whether the health insurance was taken for your children, spouse, parents, or self. When health insurance is for yourself, children or your spouse premiums up to a total of Rs 25,000 per year are eligible as tax-deductible. If you also cover an additional health insurance policy for your ageing parents, you get an additional tax benefit of premiums paid up to a limit of Rs 25,000, adding up to Rs 50,000. If your parents are senior citizens above the age of 60, this limit is Rs 50,000 per policy.
4. Features of Section 10 (10D and 10A) Tax Benefit
Section 10(A) is for retirement plans such as pension schemes. As per 10A, one-third of your retirement payout at maturity will be tax-free, and is referred to as ‘commutation’. Section 10(10D), on the other hand, is for life insurance policies. As per Section 10(10D), the maturity payouts, death benefits or bonuses received through a life insurance policy are tax-free as per certain conditions under the section.
5. Stages of Insurance Policy with a Tax Benefit
Insurance plans truly are tax saving investments. As per the Income Tax Act of 1961, you can save at every stage of a life insurance policy. Here are the tax benefits you get at every stage of life, health or pension insurance policy by ICICI Prudential.
Stage 1— You receive an entry advantage in the form of tax benefits on your premiums for life insurance (Section 80C), pension scheme (80CCC) and health insurance (Section 80D)
Stage 2— Your investment gets an earnings advantage with ICICI Prudential since it has the potential to grow without being taxable.
Stage 3— With a ULIP investment, you get the exclusive switching advantage that allows seamlessly switching between debt, equity and balanced funds without being taxed accordingly.
Stage 4—Finally, you get an Exit Advantage in the form of a maturity benefit that is tax-free (Section 10(10D)).
6. Amount Saved Through 80C and 80D Deduction
As per Section 80C, the taxation on Rs 1.5 lakh worth of premiums is tax-deductible. This clause, hence, gives you permission to save up to Rs 46,800 in taxes each year. However, this is the maximum amount for one tax saving instrument. If you have another tax saving instrument under 80C, the maximum amount that can be saved is the same. Similarly, with 80D, if you have a health policy for yourself as well as any dependent over 60 years of age, the maximum amount you can claim as tax-deductible is Rs 75,000 (Rs 25,000 + Rs 50,000).
7. Conditions for Tax Benefits on Life and Health Insurance
Keep in mind the following conditions with respect to claiming tax deductions, be it an 80C deduction or an 80D deduction:
You cannot avail of tax benefits on health insurance under 80D if you pay premiums through cash. Any other online mode of payment such as cards, cheques, drafts or Internet Banking enjoys the tax benefit of the 80D deduction.
Life insurance maturity payouts under Section 10 10(D) should be 10% or more than the premiums paid towards the policy in each financial year. If the annual premium amount exceeds 10% of the sum assured, one cannot receive their sum insured tax-free.
80D and 80C deductions can be claimed for years when one has paid their premiums. If you opt for a single premium life policy, you can only claim 80C deductions once.
8. Procedure for Filing Tax Deduction Claims
Income Tax Returns can be downloaded as a prefilled form online. There are different types of forms, so find the one you are eligible for. Fill out the form with accurate salary income, income from interest and other financial details. Once the form is filled up online, including tax refunds from your insurance policies, click on ‘Validate’ under the ‘Taxes paid and Verification’ sheet. The sheet will automatically calculate the refund that is due to you, which will be visible on the sheet in a separate row. Submit the form which shows the correct amount of tax refunds applicable to you.
9. Added Benefits of Insurance Cover
Insurance comes with its own set of incentives. Firstly, your loved ones have a financial cushion that can aid them when you are not around. You can get income replacement policies that payout the maturity at intervals such that your insurance serves as a revenue stream for your loved ones. What’s more? Policies like ICICI Pru’s iProtect Smart are flexible to suit your financial needs and offer coverage until age 99. If you wish to start out with lower premiums, invest in insurance early on.
10. Don’t Buy Insurance Only for Tax Benefits
Carefully compare insurance policies instead of going for any policy just for the tax benefits. Reading the fine print of your policy is absolutely crucial. As an affordable tax saving investment option, ICICI Pru’s iProtect Smart Life Insurance is one of the best plans in the market. You can customise your premiums as monthly, half-yearly or annual payments, as per your schedule.
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