When one becomes a parent, the well-being and happiness of the child become an instant priority. Most parents work hard so that they may financially secure their children’s present and help them live successful lives.
However, as important as it may be to secure your child’s present, it may be as much crucial, to financially secure your child’s future. A child insurance plan may go a long way in helping you achieve the latter. Aside from having financial security for your child, you may also enjoy the tax benefits on a child insurance plan.
Adding a child insurance policy to your financial portfolio may act as a boost to your tax-saving strategy since it provides you with tax benefits, subject to the terms and conditions specified in the Income Tax Act, 1961. Let’s take a detailed look into child insurance plans and the tax benefits applicable on them.
How Does a Child Insurance Plan Work?
First, let’s understand how a child insurance plan works. As a parent, an important consideration you might have, is making sure your child’s future is bright. You may want to ensure they have good-quality education, strong physical and mental health, and a positive attitude towards life. A sense of financial security may be vital in helping you achieve these aspects for your little one.
While you may be working hard today and be able to provide for your child, one cannot say when an unfortunate event might occur and lead to your child lacking financial security. Hence, a child insurance plan can be a preferable inclusion in a parent’s financial portfolio.
Child insurance plans are designed with the objective of providing financial support for the various important milestones in a child’s life. In some child plans, the pay-out may be provided at designated periods in the child’s life, such as when they start their higher education, get married, or pursue their entrepreneurial venture etc. There are tax-benefits under Income Tax Act, 1961 on these pay-outs as well, depending on the terms and conditions being met, which we shall look into in the next section.
A child insurance plan is also, ultimately, a life insurance policy, and thus, it can also provide financial compensation when the policyholder (usually, the parent) passes away.
Let’s take Mr. Rahul’s example. Mr. Rahul had plans to send his 3-year-old daughter, Deepika, to a foreign university for her higher education. So, he bought a child insurance plan which would provide a pay-out when Deepika turned 18 years old. He estimated the total cost of her foreign higher education plan to be around Rs 80 lakhs, taking an average inflation rate of 5%. He paid the premiums on time throughout the tenure. When Deepika turned 18 years of age, she opted for a university of her choice. The payout received from the child insurance plan eased out her finances for this big step.
What Are Income Tax Benefits on A Child Insurance Plan?
As mentioned earlier, the tax benefits on a child insurance plan are substantial. Here is a brief look at them:
• Deduction on premiums[1]
Under Section 80C of the Income Tax Act of 1961, the premiums paid for a life insurance policy bought in the name of self, spouse, or child, may be used to claim tax deductions up to a maximum of Rs 1.5 lakhs, subject to the provisions stated therein. Thus, the premiums that you pay for the child insurance plan may help you reduce your tax liability by a considerable amount.
To claim Section 80C tax benefits on a child insurance plan, it is required that your annual premium should not exceed 20% of the capital sum assured if your policy is bought before 1st April 2012. For policies purchased thereafter, the annual premium should not exceed 10% of the capital sum assured. If premium amount is exceeding threshold limit, deduction is restricted up to 20% or 10% of capital sum assured as per the policy issuance date.
An important point to note is that tax benefits on a child insurance plan involving Section 80C are only available for those who pay tax under the old tax regime. If you have selected the new tax regime, then these tax benefits may not be applicable to you.[2]
• Exemption on maturity proceeds [3]
As per Section 10 (10D) of the Income Tax Act of 1961, the maturity proceeds (including bonuses) from any type of life insurance plan are eligible for tax exemption subject to satisfaction of conditions mentioned therein. So, the pay-outs you may receive from the child insurance plan may not be taxed as income.
This tax benefit is not applicable to policies bought before 1st April 2012, where the annual premium exceeds 20% of the capital sum assured. The limit decreases to 10% of the capital sum assured for policies bought after 1st April 2012.
Please note that these tax benefits are subject to changes in the tax laws.
Depending on the type of policy you have opted for, the terms and conditions for claiming the tax benefits on the child insurance plan may vary. As per Union Budget 2023$ income from life insurance policies (other than ULIP) with annual premium aggregating up to Rs. 5 lakhs, issued on or after 1st April, 2023 will be tax free as per the provisions of the Income Tax Act, 1961[4]. If the aggregate premium of life insurance policies (Other than ULIP) exceeds Rs. 5 lakhs during the term of policy, policyholder will have to pay tax on the maturity proceeds, as per the provisions of the Income Tax Act, 1961[4]. The death benefits, however, will be exempt from taxes irrespective of the premium amount[4].
Income from ULIPs with annual aggregate premium above Rs. 2.5 lakhs issued on or after 1 February 2021, will attract capital gains tax, as per the provisions of the Income Tax Act, 1961[5]. If ULIP policy is issued before 1 Feb 2021, proceeds from such policy will be tax free in hands of policyholder subject to satisfaction of conditions mentioned under Section 10(10D) of Income Tax Act, 1961
FAQs
1. How can I get an idea of my tax liability after deducting the child insurance premiums?
To get an estimate of your tax liability, you may use an income tax calculator[6]. You may need to add your personal details, such as salary, income from other sources, deduction related details for the investments you have made, and you may be able to see the tax liability under old and new regime.
2. How can I use the child plan calculator?
A child plan calculator[7] is a tool that estimates the premium amount you may need to pay under the child plan to help achieve the goals set for your child.
You may have to input some details into the calculator, such as the goal amount you require, by what time, the expected rate of return, the rate of inflation, and so on. Once you have entered these details, the calculator shows you an approximate figure you may pay at regular intervals to achieve your child’s goals.
Ref:
1https://cleartax.in/s/life-insurance-taxability#:~:text=by%20such%20resident.-,Deduction%20under%20Section%2080C%3A,-If%20you%20have
2https://cleartax.in/s/section-115bac-features-new-tax-regime-benefits#:~:text=Chapter%20VI%2DA%20deduction%20(Section%2080C%2C%2080D%2C%2080E%20and%20so%20on%2C%20except%20Section%2080CCD(2)%20and%20Section%2080JJAA)
3https://cleartax.in/s/life-insurance-taxability#:~:text=on%20the%20policy.-,Exemption%20under%20section%2010(10D)%20on%20Maturity%20amount%20received,-When%20the%20premium
4https://www.zeebiz.com/union-budget/news-budget-2023-maturity-proceeds-of-life-insurance-policies-with-annual-premium-of-over-rs-5-lakh-to-be-taxed-fm-220065
5https://economictimes.indiatimes.com/wealth/tax/how-capital-gains-on-ulips-will-be-calculated-cbdt-notification/articleshow/88996809.cms
6https://www.bajajallianzlife.com/life-insurance-calculator/income-tax-calculator.html
7https://www.bajajallianzlife.com/life-insurance-calculator/child-plan-calculator.html
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