Are we familiar with tax saving instruments that serve a dual purpose? We already know of the tax savers like PPF, Mutual Funds, Fixed deposits, etc. What if we tell you that investing in a good insurance plan can help attain your financial goal as well as help save on tax. Would you believe us?
Most are unaware of the fact that different types of tax saving investments plans are available in the market. Moreover with rising medical costs everyone needs sufficient insurance or medical coverage. This dual benefit are rarely found in tax saving tools other than tax saving insurance plans.
Here are a few highlights that will help you understand the how tax saving insurance plans work. This should help you invest wisely and save on that much dreaded tax that feeds on your salary every financial year end.
When you purchase an insurance policy, you are liable to pay its premium. Under Section 80C, premium paid for any life insurance policy taken qualifies for tax deduction. Tax deduction is applicable only to the policyholder on account of insurance premium paid for a particular financial year. Tax exemption u/s 80C (as well as u/s 80CCC & 80CCD) is upto a maximum amount of Rs.1,50,000. A minimum holding period of a tax saving insurance policy, however, is defined as 2 years.
Under section 80D, the investor can claim for tax deduction on purchase of medical insurance policy as per Income Tax Act, 1961. More on this can be learnt from the income tax government of India website. The premium should be payable by the policyholder, his/her spouse, and/or parents and/or dependent children. The tax deductible is uptoRs. 25,000, whereas if premium is paid for senior citizens then the tax deductible is Rs. 30,000.
Now that we’ve understood the basics of the basics of a tax saving insurance plan, like life insurance and Mediclaim insurance policies, let us try and understand it better. This will help you as an investor affirm the type of insurance you want to purchase for you and your family.
Life Insurance and Tax Deductions (Section 80C)
Life insurance policies have a lot to offer, e.g., wealth maximisation, life coverage, retirement plans, child’s saving options besides functioning as a tax saving insurance plan. Section 80C of the Income Tax Act has the following conditions with respect to tax deductions on life insurance policies.
Either the individual policyholder or HUF (Hindu Undivided Family) is eligible to claim tax deductions on premium paid.NRI’s or even those of foreign nationality who have invested in life insurance policies within the country is eligible for exemption under the Act.As an investor in life insurance policy you can be the policyholder or purchase policy for your spouse, dependent parents or dependent children. There is no limit mentioned to the number of children included.You can purchase either a traditional plan policy, pure term policy or even ULIP’s. All of them fall under the category of life insurance policies.Maximum amount that is exempted from tax is Rs. 1,50,000. This includes all avenues of insurance or investment holdings and premium paid on life insurance.Minimum years of holding life insurance policy is 2 years and maximum is 5 years. If the policyholder decides to terminate or surrender the policy within this timeframe, the benefits he got under the tax saving insurance plan will be reversed.Tax deduction on your life insurance policy is based on certain qualifications. If issued after 1st April 2012, premium is less than 10% of sum assured. If issued before 1st April 2012, premium paid should be lower than 20% of sum assured.
Health Insurance/ Mediclaim and Tax Deductions (Section 80D)
Section 80D allows for the individual policyholder or HUF, NRI or foreign resident eligible to claim for tax deductions on premium payment of health insurance/mediclaims.U/s 80D, there are a few payments that can be exempted: Health Insurance policy payment,Central Government Health Scheme (CGHS),Cost/expense on health checkup Premium payments for health insurance policy can be made by the policyholder, spouse, dependent children or even dependent parents.Any type of accident policy however does not apply for tax deduction. What can qualify for tax deduction are mediclaim policies and critical illness policy.Tax exemption on health insurance premium is relative to the year the premium is paid, this is called “payment basis”.Tax deduction is applicable only if the premium is paid in other modes of payment other than cash.The value received on maturity is exempted from tax under critical illness policy.Maximum tax benefit for policyholder is Rs. 25,000 whereas for senior citizen is Rs. 30,000.
There are certain exemptions when it comes to tax saving insurance plansthat you might want to make note of. Section 10(10D) states that all proceeds received for your life insurance policy are also exempted from tax as per the Act.