Life insurance protects you and also helps you save tax. This article studies its tax saving implications.
Before understanding how you can save tax on life insurance, let us first get to grips with how your taxable income is calculated vis-à-vis the tax saving investments you make.
Suppose the taxable portion of your income amounts to Rs 5,00,000. This means that your tax liability for the year would be computed for Rs 5,00,000, based on your income bracket. Thus, if a certain investment option is said to give a tax benefit up to Rs 50,000 per year, for example, then this Rs 50,000 is deducted from your taxable income, i.e. Rs 5,00,000. Thus, your tax liability would now be calculated on Rs 4,50,000.
• The more tax saving options you invest in, the lower your taxable income becomes. It is recommended that you look up a variety of tax-saving options spanning different sections of the Income Tax Act, 1961 to reduce your taxable income component considerably.
• These options include tax saving life insurance plans, health insurance, mutual funds, PPF (Public Provident Fund), NPF (National Provident Fund), home loan, etc.
• The life insurance tax benefits are ingrained in Section 80C of the Income Tax Act, 1961. You can claim a maximum deduction of Rs 1,50,000 per year against the premiums paid for the life insurance policy.
• The tax saving life insurance plans include policies taken for yourself, or your spouse, or dependent children.
• However, you must be able to show that you are paying the premiums against these options from your income. Do bear in mind that you and your employed spouse cannot claim life insurance tax benefits on the same plans in one year.
A few pointers on tax benefits on life insurance
* You can claim deduction under Section 80C if the premium paid is not over 10% of the sum assured in the policy, if the policy has been purchased after April 1, 2012. If the policy has been purchased before April 1, 2012, then the premium must not be over 20% of the sum assured.
* If you have purchased a life insurance policy for a disabled family member or if such a condition applies to yourself, then you can save tax on life insurance by claiming deduction under Section 80C if the premium paid does not exceed 15% of the sum assured. However, the disability must be listed under Section 80U or the terminal disease under Section 80DDB of the Income Tax (IT) Act.
* Another life insurance tax benefit is that the maturity amount received on the policy is not taxed under Section 10D if the premium does not exceed 10% of the sum assured. This exemption is not available for premiums exceeding 10% of the sum assured.
* However, TDS is deducted on policies whose maturity amount exceeds Rs 1,00,000, but this TDS can be claimed by filing the subsequent year’s ITR.