Life insurance provides a protective cover for you and your family in times of need. However, despite being such a useful tool, the insurance penetration in India, at 3.7%, was lower than the global average of 6% in FY2018-19, according to the Insurance Regulatory & Development Authority of India (IRDAI). Hence, to ensure that more people can benefit from life insurance, the government has been offering incentives in the form of tax benefits on life insurance. In fact, life insurance policies can be among the best tax saving investments you can avail.
What is a Savings Plan?
A savings plan, such as an endowment policy or a money-back insurance plan, is a type of life insurance that offers the dual benefit of providing a life cover for you and your family along with building a financial corpus for the future. In addition to that, the tax benefits on savings plans help to further boost the fund, making it the best life insurance policy with high returns.
What differentiates a savings plan from other forms of life insurance or investment plans is that along with the life cover, the sum assured and the savings component come in the form of a guaranteed income when the policy matures. As a death benefit, the late policyholder’s family continues to receive the sum assured under the life cover, in addition to the savings accumulated in the plan until the last premium paid.
Tax benefits on savings plans
Under Section 80C of the Income Tax Act, 1961, one can claim a tax deduction of up to ₹1.5 lakhs on the premiums of a life insurance savings plan that makes up for their taxable income.
Similarly, Section 10(10D) under the Income Tax Act makes income earned on maturity tax-free. However, this is possible only if the premium is less than 10% of the sum assured or the sum assured exceeds the premium by 10 times.
How to avail tax benefits on savings plans?
- Buying a life insurance policy: You can avail tax benefits once you purchase a suitable savings plan from a reputed life insurance provider. You can choose from money-back insurance plans as well as endowment policies, to see which one suits your needs better.
- On premiums paid: The premiums you pay under a savings plan up to ₹1.5 lakhs will be tax-deductible under Section 80C of the Income Tax Act.
- Maturity benefits: The sum assured of a savings plan as well as the maturity proceeds are eligible for tax exemption under Section 80C and Section 10 (10D) of the Income Tax Act.
- Death benefits: If the policyholder does not survive the policy term, then the beneficiaries or nominees receive the sum assured, along with the accumulated savings component (on the premiums paid till date) which are exempt from taxes under Section 10 (.
What is Section 80C?
Section 80C of Income Tax Act, 1961 allows individuals and Hindu Undivided Family (HUF) to claim up to ₹1,50,000 as a tax deduction from their annual income as non-taxable income. This deduction is applicable to certain payments and investments made by the tax-payer.
What is Section 10 (10D)?
Under Section 10 (10D) of the Income Tax Act, 1961, an individual can avail tax exemption on the sum assured and accrued bonus (if any) received through their life insurance policy claim (maturity or death benefit).
While a life insurance savings plan helps you save funds for the future along with protecting your and your family, the tax benefits make it a lucrative option as wholesome life cover. However, saving taxes on your life insurance policy should not be your sole motive for purchasing a savings plan. Look at all the features, nature and extent of coverage, guaranteed benefits, sum assured, claim settlement ratio and claim settlement process before choosing any savings insurance plan. Good Luck!