Role of Insurance in Saving TaxesPosted on Sept, 2020
Mr. Mehta was in a state of shock when he realized that a huge share of his hard-earned money was deducted from his remuneration for taxes. He had heard of the tax savings method, but he has deferred all the investments for Q4 to choose the right product. To his surprise, the TDS deduction was as high as one-third of his salary.
There are tax-planning methods that have been devised under the Income Tax Act. There are different tax planning methods like Fixed Deposits, PPF, Equity-linked savings scheme (ELSS), EPF, NSC, etc. All these instruments provide wealth creation and tax saving options. Ever heard of the other options that offer twin benefits? A tax saving insurance plan empowers an individual with the twin benefits of saving tax and protection in case of unforeseen circumstances. In the world of rising medical costs, it becomes necessary to have sufficient medical coverage.
Let us understand the basics of insurance plans. Whenever you purchase an insurance plan you are liable to pay its premium. In case of life insurance and health insurance policies the premium paid qualifies for tax exemption. However, there is a limit imposed by the government on tax deductions.
Under Section 80C of Income Tax Act, an individual is entitled to an exemption of up to Rs. 1,50,000/- on the amount spent on the premium. The annual deduction on the premium is capped to Rs. 1.5 Lakhs a year, even if an individual pays a higher premium exceeding this amount. The investments can be made in any life insurance policy like Term Plan, Unit Linked Insurance Plan (ULIP), Child Plan or Savings Plan. In the case of ULIP, the policyholder must hold the policy for a minimum of five years, however for all the other life insurance policies, the holding period is a minimum of two years to qualify for the exemption. If the policyholder decides to terminate the policy within this period, the benefits claimed under the tax savings will be reversed. Further, the premium paid should always be less than 10% of the sum assured in case of life insurance plans.
Apart from life insurance, the Income Tax Act offers savings on health insurance plans under section 80D. Under section 80D, there are a couple of payments which are exempted from tax such as Health insurance policy premium, Central Government Health Scheme (CGHS), cost on health check-up premium payments made by individual, spouse, dependent children, or parents. Tax exemption on a health insurance policy is relative to the year in which the premium is paid called “payment basis”. Further, the exemption is valid only if the transaction is made in modes other than cash. The amount exempted from taxes is Rs. 25,000/- for an individual, however in case of senior citizen it goes till Rs. 50,000.
The sum received under a life insurance policy along with the bonus is will be exempt from tax. This further empowers an insurance investment. However, there are certain conditions that must be adhered such as a sum received under 80DD or a sum received under a keyman insurance policy is not eligible for such a deduction. Mr. Mehta has pledged to plan his tax savings for the next fiscal right from the beginning. Choosing the right product is all that it takes to save your hard-earned money. Perplexed in picking-up a product? Log on to www.pincinsurance.com and connect with our experts to figure out the policy that best suits your purpose for planning tax savings.