Insurance as a Tax-Saving Investment

How Insurance Can Be a Powerful Tax-Saving Tool?

Insurance policies, especially life insurance, offers excellent tax saving opportunities while also serving as a tool for financial protection. Here are some of the insurance tools which can be a powerful tax saving investment:

1. Life Insurance Premium Deductions

   Investment in life insurance premium is an ideal choice amongst tax payers as they can avail tax deductions for premiums paid towards all life insurance policies up to ₹1.5 lakhs per annum under Section 80C of the Income Tax Act¹(in case of old tax regime). This helps you to reduce your taxable income by the amount you pay for premiums on eligible life insurance policies, including term plans, endowment plans, and more¹.

   For example, if you pay premiums of say ₹1.2 lakhs for your term life insurance policy, you can claim deduction of the premium paid of ₹1.2 lakhs from your taxable income under Section 80C (in case of old tax regime) and decrease your tax liability .

   However, to claim the tax deduction, the following conditions should be met –

   • The premiums paid for the policy should not exceed 10% of the total sum assured for all the policies issued on or after 1^st April 2012.
   • For policies issued before this date, premiums up to 20% of the sum assured would be allowed as a deduction.
   • For policies issued on or after 1^st April 2013 where the life assured suffers from a disease or disability as specified under 80DDB or 80U, premiums up to 15% of the capital sum assured will be allowed as an income tax deduction.
   • If a policyholder voluntarily chooses to surrender his policy or if the policy is terminated within two years from its commencement, no tax benefits will be offered on the premium payments.

2. Tax-Free Death Benefit

   One of the key advantages of life insurance policies is that the death benefit paid to the beneficiaries is always tax-free⁴. This guarantees that your family receives the entire death benefit amount without having to worry about any tax obligations ensuring financial security during such a challenging event.

   This makes life insurance an attractive tool for individuals looking for long-term financial planning, ensuring that their loved ones are financially secured even in their absence, without tax implications on the amount they receive.

3. ULIP Plans and Tax Saving

   Insurance-cum-investment plans offers a blend of life insurance coverage, market-linked returns, as well as tax advantages. These Unit Linked Insurance Plans combine the benefits of life insurance protection with market-linked investments. The premiums paid for these plans are eligible for tax deductions under Section 80C of the Income Tax Act, 1961 with a yearly limit of ₹1.5 lakh¹(in case of old tax regime). These plans enable you enjoy life insurance coverage while simultaneously investing in a range of market linked asset classes such as equity, debt, and hybrid funds.

4. Tax Benefits on Pension Plans

   In addition to traditional life insurance policies, pension and retirement plans, also offers attractive tax benefits. The premiums paid towards pension plans qualify for tax deductions under Section 80CCC⁵(in case of old tax regime). Pension plans help you create a corpus for your retirement, and the tax-free growth of the investments makes them an excellent choice for accumulation of wealth. With pension plans, you can enjoy the dual advantage of securing your post-retirement. years while reducing your taxable income.

    

5. Tax-free Maturity Benefits

   The maturity benefit received from life insurance policies also qualify for tax exemptions². Here are the rules of exemption that you need to know –

   • For traditional life insurance policies, like endowment plans, term insurance, money-back, etc., issued before 1^st April 2023, the maturity benefit will be fully tax-free u/s 10(10D) if the premium is up to 10%, 15% or 20% of the sum assured².
   • For traditional life insurance policies issued on or after 1^st April 2023, the maturity benefit will enjoy tax exemption only if the aggregate premium paid in a financial year is up to ₹5 lakhs²subject to satisfaction of Section 10(10D) conditions.
   • In the case of ULIPs, the maturity benefit will be fully tax-free for policies issued before 1^st February 2021 if the premium is up to 10%, 15% or 20% of the sum assured³
   • For ULIPs issued on or after 1^stFebruary 2021, the maturity benefit will be tax-free only if the aggregate premium paid in a financial year is up to ₹2.5 lakhs³ subject to satisfaction of Section 10(10D) conditions.

Conclusion

Life insurance is an essential tool for financial protection and security, and it also plays an important role in tax-saving strategies. By investing in the right insurance policy, you can easily reduce your taxable income, enjoy tax-free benefits, and protect your loved ones. Whether you’re looking to secure your financial future with life coverage, create a retirement corpus or invest in market-linked plans, you can choose from a variety of options tailored to suit your insurance needs while saving in taxes.