Entering the new calendar year brings you nearer to the conclusion of the financial year. It is essential to comprehend your tax obligations before establishing any financial objectives. Examining your financial situation provides a comprehensive view of your present standing, and skilfully integrating insurance can yield various advantages beyond mere protection. Insurance products play a significant role in tax-efficient financial planning.
The initial step involves determining whether you are maximizing the use of tax deductions to their full potential. Utilizing various insurance products, each offering substantial tax benefits, is one avenue to reduce your tax liability. These include:
Term life plans
Term life insurance is an excellent choice for those in search of straightforward life coverage without the intricacies of investment-linked schemes. Such plans provide substantial death benefits at comparatively affordable premiums when compared to other types of life insurance. This affordability is particularly advantageous for young individuals. Furthermore, all premiums paid for term life insurance qualify for tax deductions under Section 80C of the Income Tax Act, with a yearly limit of ₹1.5 lakh. This not only significantly lowers your taxable income but also results in savings on your tax expenses.
An important benefit of term life insurance is that the death benefit received by the policyholder’s family in the event of their untimely demise is entirely tax-exempt under Section 10(10D) of the Income Tax Act, 1961. This guarantees that your loved ones receive the entire amount without any tax obligation, offering essential financial support during a challenging period.
While conventional term plans lack a maturity benefit, numerous contemporary term plans now incorporate a “return-of-premium” feature. Essentially, if the policyholder outlives the policy term, they will receive a lump sum amount equal to all the premiums paid (excluding GST). This introduces an extra layer of financial advantage to the inherent protection provided by term insurance.
Insurance-cum-investment plans
Insurance-cum-investment plans provide a blend of life coverage, returns, and tax advantages. The premiums paid for these plans are eligible for tax deductions under Section 80C of the Income Tax Act, with a yearly limit of ₹1.5 lakh. This has the potential to lower your taxable income and result in tax savings.
An exemplary illustration of such plans is Unit Linked Insurance Plans (ULIPs), which provide a distinctive blend of life insurance protection and the opportunity for wealth creation through investments linked to the market.
The maturity benefit derived from a ULIP is exempt from tax under Section 10(10D) of the Income Tax Act, provided that the annual premium paid does not surpass ₹2.5 lakh. It’s crucial to keep this in mind, as exceeding this limit can subject the taxation returns.
Moreover, for specific guaranteed plans meeting specified conditions, the maximum tax deduction limit for ULIP premiums increases to ₹5 lakhs. This can be advantageous for individuals aiming for higher tax savings.
Health insurance
Securing a health insurance policy is crucial for safeguarding your financial well-being and ensuring access to adequate medical care in the event of illness or injury. Similar to life insurance, health insurance provides substantial tax advantages, albeit under a distinct section of the Income Tax Act—Section 80D.
Parimal Heda, Chief Investment Officer, Go Digit General Insurance said, “Under the old tax regime, an individual or Hindu Undivided Family (HUF) can claim a tax deduction from their total income if they have paid any health insurance premiums in the given financial year. This provision is available to all taxpayers under Section 80D of the Income Tax Act and is also applicable to any top-up health insurance plan or critical illness plan bought during the year.”
Let’s delve into the tax advantages linked with health insurance:
- The premiums paid for health insurance covering yourself, your spouse, your dependent children, and even your dependent parents are eligible for deductions under Section 80D.
- The deduction limit varies based on your age and family structure:
a) Individuals and HUFs below 60 years old can claim up to ₹25,000.
b) Individuals and HUFs aged 60 years and above have a deduction limit of up to ₹50,000.
c) An extra ₹5,000 can be claimed for preventive health check-ups for both yourself and your family members, within the overall limit.
By availing deductions for health insurance premiums, you effectively diminish your taxable income, resulting in a decreased tax liability. The incentives offered by Section 80D in the form of tax benefits encourage individuals to invest in health insurance, thereby fostering improved accessibility to healthcare.
Nevertheless, specific health insurance policies such as critical illness plans or pure accident plans might not be eligible for deductions under Section 80D. Hence, it is vital to select a health insurance plan that aligns with your particular requirements, covering essential medical expenses while also providing tax benefits. Investors should keep in mind that the primary focus of health insurance should be on its core purpose of offering medical protection, with tax benefits viewed as an additional advantage.
Optimizing your tax liability and ensuring crucial financial security and peace of mind can be achieved by integrating diverse tax-saving insurance products such as term life insurance, health insurance, ULIPs, and specific investment options within the framework of Section 80C.
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Published: 27 Jan 2024, 11:53 AM IST