What are life insurance savings plans?
As mentioned earlier, life insurance savings plans are savings-oriented insurance plans which help to create a corpus for your financial goals. Moreover, these plans provide financial security in the form of life insurance protection. If the insured person dies during the policy term, a death benefit is paid, which can provide the family with much-needed financial assistance.
Usually, endowment plans and money-back plans are referred to as life insurance savings plans. Let’s understand their tax implications.
What are the tax benefits available with life insurance savings plans?
Life insurance savings plans offer multiple tax benefits, which are discussed below –
Tax benefit on the premium paid
The premium paid for a life insurance savings policy qualifies as a deduction under Section 80C1(incase of old tax regime). You can claim a maximum deduction of ₹1.51 lakhs subject to the fulfilment of the following criteria –
- If the policy was issued on or before 31st March 2012, premiums up to 20% of the sum assured can be considered as a deduction1.
- For policies issued on or after 1st April 2012, premiums up to 10% of the sum assured qualify as a deduction1.
- For policies issued on or after 1st April 2013 for policyholders suffering from a disease of disability as defined under Section 80DDB or 80U, premiums up to 15% of the capital sum assured qualify as a deduction1.
Tax benefit on the benefits received
The benefits received from the savings plans, including bonuses, guaranteed additions, etc., also qualify for tax exemption. Here are the benefits that you get –
- The death benefit received is completely tax-free, without limits2
- For policies issued on or before 31st March 2023, the maturity benefit received will be fully tax-free under Section 10(10D) if it fulfils the premium criterion3
- For policies issued on or after 1st April 2023, the maturity benefit will be tax-free if the aggregate premium for all traditional life insurance plans is up to ₹5 lakhs in a financial year3 and the policy is compliant with Section 10(10D).
How to save tax with savings plans?
Now that you know the tax benefits of savings plans, here are some tips that can help you save tax –
Choose the right policy
When buying a savings plan, choose a policy that matches your coverage needs and financial goals. This will help you get the corpus when you need it the most.Opt for add-ons for wider protection
Savings plans offer optional coverage features called riders which come at a nominal additional premium. These riders add to the scope of the policy and provide additional benefits in emergencies.
Explore the available riders and choose suitable ones to enjoy comprehensive protection. Moreover, if you choose the critical illness benefit rider, you can enjoy an added tax deduction under Section 80D of the Income Tax Act4 (incase of old tax regime).
Choose adequate sum assured
The sum assured of the policy should be adequate to provide you with the corpus needed for the financial goal for which you bought the policy. A low sum assured would not fulfil the purpose of the saving. Plus, in the case of unfortunate demise, an inadequate sum assured would not provide your family the financial assistance that they need.
Having optimal sum assured would also mean higher premiums, which would help you claim a maximum deduction under Section 80C (incase of old tax regime). So, it’s a win-win in all situations.
Choose the right premium payment frequency
Many life insurance savings plans allow you to pay the premium in a single instalment (single pay) , a limited tenure (limited pay) or throughout the policy term (regular pay). Choose a payment mode that aligns with your budget and financial planning. This will help you enjoy the coverage and tax benefits of the savings plan without any financial pinch.
Conclusion
Life insurance plans cover the risk of premature demise and provide financial security. Plus, when you choose savings plans, you get the added benefit of creating a savings corpus for your financial goals. So, assess your goals, quantify them and buy suitable savings plans to create a corpus for their fulfilment.
While the savings plans would help you save up for your financial goals, the tax benefits offered would also help you lower your tax liability. Reduced tax liability means enhanced disposable income, which you can use for additional savings.
So, understand the tax benefits of life insurance savings plans and utilise the tips mentioned above to maximise the tax-saving potential of these plans.