Ways How Life Insurance Plans Help To Save Tax
Life insurance plans are not only tax saving options, but also value-packed investment solution that offer numerous benefits. Here is a brief about how life insurance plans help you to save tax.
Generally, most of us push our tax planning investments until the end of the financial year that is in the month of March. This may lead to some hurried investment decisions that may not be a good investment decision. Investments should be made first to meet your financial goals thereby act as a tax saving investment.
Prior to your investment decision, it is vital to know your taxable income and how much tax you need to pay according to your income. The income of an individual is divided under three rates of income tax. We take an example of an individual whose income is Rs 6 lakh to explain the above tax slab.
Let’s understand how
The annual income till Rs 2.5 lakh will not be covered under any tax. The amount from Rs 2.5 lakh to Rs 5 lakh will be covered under the tax rate of 5%. That is 5% of Rs 2,50,000 which equals to Rs 12,500. Beyond Rs 5 lakh, the remaining amount of Rs 1 lakh falls under the tax rate of 20% which equals to Rs 20,000. So, the total taxable amount is Rs 12,500 + Rs 20,000 + Rs. 1,300 (4% of income tax i.e. cess charges) = Rs 33,800. For income of Rs 10 lakh and above, the third tax rate applies at the rate of 30%. Surcharges are charged above income of Rs 50 lakh at 10% and above Rs 1 crore at 15%. But this amount is claimed under different sections of Income Tax, 1961.
Under different sections one can claim tax deductions if the amount is invested in tax saving instruments such as Employee Provident Fund, Public Provident Fund (PPF), Fixed Deposits, National Savings Certificate or any tax-saving mutual funds like Equity Linked Savings Scheme (ELSS). Tax saving investments are not only a way to save tax, but also achieve your financial goals by being a part of your investment portfolio.
So, how to save your taxes with insurance plans?
Section 80(C) – Investment in tax saving insurance policies can help you claim tax up to Rs 1,50,000 under this section. Your investment can be in any life insurance policy such as Term Plan, Unit Linked Insurance Plan (ULIP), child plan or savings plan. For ULIPs, the policy holders have to hold the policy for minimum 5 years while in case of other policies the holding time has to be a minimum of 2 years.
The annual deduction is capped to Rs 1.5 lakh per year, irrespective if the person gives a premium higher than this amount. So, the claim deduction is less than or equal to 10% of the sum assured.
Section 10 (10D): Under this section of the Income Tax Act, 1961 maturity benefit and death benefit are also liable for tax deductions. The annual premium can be claimed for deduction for less than or equal to 10% of the sum assured.
Section 80 (D): Critical illness policy and health insurance are also subjected to deduction up to Rs 25,000 under Section 80(D) of the Income Tax Act, 1961. The limit for senior citizen is capped up to Rs 50,000.
Life insurance is beyond tax savings
Life insurance not only helps you save your taxes, but also gives financial coverage for your family in case of your demise. Few insurance policies are also designed in a way so that they help in building wealth along with covering life risks. Choose your life insurance policy that will help you save tax and build your wealth wisely.
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