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Emergency Savings Strategies
Tax Benefits of Life Insurance Plans – Life insurance policies can be useful tax planning tools because the policyholder is eligible for tax benefits under the Income Tax Act 1961 (Act). Though there are multiple modes for saving tax, life insurance is one of the most effective tax planning instruments. Plans from Max Life Insurance can be used for protection, long-term savings, and tax planning. There are two kinds of income tax benefits available to individuals with respect to long term savings being made in Life Insurance policies:
Deductions
1. 80C/80CCC:
1. Benefit is available to Individual assessee and Hindu Undivided Family assessee.
a. In case of the individual assessee – Himself/herself, spouse, children of such individual
b. In case of HUF assessee – any member of HUF
2. If the amount of premium paid in a financial year for a policy is in excess of 20% of the actual capital sum assured, then the deduction will be allowed only for premiums up to 20% of the sum assured.
3. For insurance policies issued on or after April 01, 2012, the deduction is allowed for only so much of the premium payable as does not exceed 10% of the actual capital sum assured. (15% of actual capital sum assured in case of a person with severe disability or specified ailment).
4. Above benefits shall be reversed if the policy is terminated/cease to be in force within 2 years for traditional products and 5 years for ULIP products after the date of commencement of the policy.
5. Sec 80CCE – Maximum amount of deduction that an assessee can claim under Sections 80C, 80CCC will be limited to Rs. 150,000.
2. 80D
1. Benefit is available to Individual assessee and Hindu Undivided Family assessee.
a. In case of the individual assessee – Himself/herself, spouse, dependent children, and parents of such individual
b. In case of HUF assessee – any member of HUF
2. The qualifying amounts under Section 80D for self, spouse, and dependent children are up to Rs. 25,000/- and additional deduction up to Rs. 25,000/- for the parents. However, a higher amount of up to Rs. 25,000/- is permitted for parents, if they are senior citizens. Assessee is allowed to make any payment on account of preventive health checkups up to Rs. 5,000 within the prescribed overall limit.
3. 80DD
Premiums paid for disabled dependents are eligible for deduction up to Rs. 75,000 every year. A higher deduction of Rs. 1,00,000 shall be allowed, where a such dependent is a person with severe disability.
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Exemptions
10 (10D)
Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, will be exempt from tax. However, this rule does not apply to the following amounts:
1. Sum received under Section 80DD(3), or
2. A sum received under a Keyman Insurance Policy, or
3. Any sum received other than as death benefit under an insurance policy which has been issued on or after April 1 2003 but on or before March 31 2012 and if the premium payable in any of the years during the term of the policy does not exceed 20% of the sum assured. For insurance policies issued on or after April 01, 2012, the exemption would be available for policies where the premium payable for any of the years during the term of the policy does not exceed 10% of the actual capital sum assured. (for policies issued on or after 01 April 2013,15% of actual capital sum assured in case of a person with severe disability or specified ailment).
The above are extracts from the Income Tax Act’1961. Please note that tax laws are subject to change and hence before placing reliance on the above, the latest version of the relevant sections should be checked. It should also be noted that the change in tax laws could have a retrospective effect also. This information should not be construed as expert tax, legal, or investment opinion from Max Life Insurance Company Limited. Max Life Insurance Company Limited would not be responsible in any manner for decisions made on the basis of the above information. Please consult your tax advisor for claiming tax benefits on insurance products. Sec 194DA of Income Tax Act 1961 provides for deducting tax (TDS) on policyholders’ payout under life insurance policy w.e.f. 01 Oct 2014. TDS, if applicable, will be deducted at 2% if valid PAN is available up to 31st May 2016. W.e.f. 01st June 2016, TDS rates have been reduced to 1%. Policyholders can furnish forms 15G/15H for non-deduction of TDS where total income /estimated total income during the financial year does not exceed the maximum amount not chargeable to tax. Further, in case a valid PAN is not available, the rate of TDS would be 20%. Get Income tax-saving benefits by investing in life insurance policies under section 80C/80CCC & 80D/80DDD. Policyholder is eligible for tax benefits under the Income Tax Act 1961
Life Insurance – Tax Advantage
In a life insurance policy, the insurance company promises to pay a certain sum of money (known as sum assured) to the nominee(s) of the insured individual should the individual pass away during the policy period. If the individual outlives the policy period, some policies, more specifically endowment, money back, wholelife policies, pay out maturity benefits to the insured individual.
- Section 80C: Premiums paid on a life insurance policy like endowment, whole life, money back policies, term insurance policies and Unit Linked Insurance Plans – qualify for tax deduction under Section 80C of the Income Tax Act, 1961. The maximum deduction that can be claimed is Rs. 1,50,000.
Tax deduction under Section 80C of the Income Tax Act, 1961, on life insurance can be claimed for premiums paid toward insuring self, spouse, dependent children and any member of Hindu Undivided Family. An important point to be noted is that if the policy is issued on or prior to March 31, 2012, annual premium up to a maximum of 20% of the sum assured becomes tax deductible. For insurance policies issued on or after April 1, 2012, annual premium up to a maximum of 10% of the sum assured is tax deductible.
- Section 80CCC: Tax deduction under Section 80CCC of the Income Tax Act, 1961, can be claimed for amount paid towards any annuity plan of Life Insurance Corporation of India or other insurance companies for the purpose of receiving pension. The maximum deduction that can be claimed under this section is Rs. 1,50,000.
- Section 10(10D): Section 10(10D) of Income Tax Act exempts you from paying taxes on the amount that you receive from the life insurance provider. Under this section, the amount of sum assured and bonus (if any) received on maturity or surrender of policy or on death of the life assured are completely tax free in the hands of the receiver, subject to certain conditions.
Health Insurance – Tax Advantage
In a health insurance policy, the insurance company will cover the cost of an insured individual’s medical and surgical expenses in the event the individual falls ill or gets injured.
- Section 80D: Tax deduction under Section 80D of the Income Tax Act, 1961, can be claimed for premiums paid toward a health insurance policy. The total deductions that can be claimed under Section 80D are as under:
| MEMBERS INSURED | TOTAL DEDUCTION |
|---|---|
| Self and family | Rs. 25,000 |
| Self and family + Parents | Rs. 50,000 (Rs. 25,000 + Rs. 25,000) |
| Self and family + Parents (senior citizens) | Rs. 75,000 (Rs. 25,000 + Rs. 50,000) |
| Self (senior citizen) and family + Parents (senior citizens) | Rs. 1,00,000 (Rs. 50,000 + Rs. 50,000) |
Note:
i) A tax deduction of up to Rs. 5,000 can be claimed for expenses borne on medical check-ups or preventive health check-ups within the above limits.
ii) The tax deduction for senior citizens has been raised to Rs. 50,000 from Rs. 30,000 for FY 2018-19 (Announced in Budget 2018). Tax benefits under Section 80D can also be claimed for premiums paid toward health insurance riders and critical illness insurance policies. It must however, be noted that premiums paid for personal accident policies or personal accident riders do not qualify for tax deduction under this section.
Conditions Associated with Claiming Tax Benefits on Life Insurance and Health Insurance Policies
- Although you can make premium payments in cash for your health insurance policies, you will however, not be able to avail tax benefits on it as the income tax rules disallow tax deductions on premiums paid via the cash mode. It is thus recommended that you choose to pay premiums through cheque, internet banking, draft or credit card to enjoy the tax advantage on premium. Cash payments for preventive health check-ups are eligible for tax deduction under Section 80D.
- To claim tax deduction under Section 80C, make sure that the premium paid during the financial year does not exceed 10% of the sum assured. If it crosses this figure, it should be noted that the benefits you can claim will be limited up to 10% of the sum assured. In case of Section 10(10D), tax exemption is subject to premium not surpassing 10% of the sum assured.
- Tax deductions under Section 80C and Section 80D can be claimed only for those years that you have paid the premiums. In case you have opted for a single premium life insurance policy, you can only claim tax benefits under Section 80C once – which will be the year you pay the premiums.
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