Know how to save tax by insurance policies

Insurance is always a great option to protect you and your family against unexpected situations that may arise anytime in the future. Apart from providing comprehensive protection when needed, insurance is also useful in the present as it helps you to save tax each year.

Mumbai: Tax saving is a very important aspect of personal finance that always catches interest of everyone and insurance is one such area through which you can save a great amount of tax. Tax saving plays a great role in helping you to offset any financial challenge that you may face while paying the premiums on your insurance cover.

A plethora of tax benefits are available through a wide choice of insurance plans, making it easier for you to take advantage of associated financial gains. Insurance tax deductions are primarily divided into 2 sections namely - Life Insurance and Health Insurance.

Saving tax with life insurance

As per the Section 80C of the Income Tax Act, 1961 the premiums paid under a Life Insurance Plan are eligible for tax deduction. As per the last tax slab, the maximum deduction that you can avail under this section is Rs. 1.5 Lakh.

Apart from policies bought for self, the premiums paid for the policies purchased for parents, spouse and kids also fall under tax deduction. The limit of Rs. 1.5 Lakh provided under Section 80C is the combined limit for Term Insurance Plans, ULIPs and other popular traditional plans.

Tax benefits can also be availed by the nominees on sum assured received as death benefit and the payout received by the insured upon the maturity of a life insurance cover.

However, the tax benefit is only available for Individuals and Hindu Undivided Families (HUF). As per the government regulations, in order to avail the tax benefit, for policies purchased before April 1, 2012, the premium must not exceed 20% of the total sum assured. And for policies purchased post April 1, 2012, the premium must not exceed 10% of the total sum assured.

Also, in case the policy holder plans to surrender the ULIP before 5 years and the term plan before two years, the tax benefit will get reversed.

Saving tax with health insurance

Under the Section 80D of the Income Tax Act, 1961, the premiums paid towards Health Insurance Plans qualify for tax deductions. Health insurance plans include Mediclaim, Top-up and Super Top-up Plans, and Critical Illness Plans. Apart from this, riders attached to Term Insurance plans like Accidental Death Rider, Partial and Permanent Disability and Hospital Cash Rider are also eligible for tax benefit.

As per the latest income tax slab, the maximum deduction that one can avail under Section 80D is Rs 75,000 that includes Rs. 25,000 for health insurance taken for self, spouse and dependent children, Rs. 25,000 for health insurance taken for parents and Rs 50,000 in case the parents are senior citizens.

Apart from this, expenses up to Rs 5,000 incurred towards preventive health check-ups can also be included in the total amount while calculating the overall tax deduction amount.

Conclusion

While buying an insurance plan, it is important to choose a plan that provides you adequate coverage against unexpected risks in life. As per industry experts, the first step for any financial planning must be to ensure that you have adequate insurance cover.

Getting adequate insurance including both health and life for self and family is very important. What's more, the premium paid against life and health insurance provides a tax benefit under different sections of the Income Tax Act, 1961.

(Written by Santosh Agarwal, Head- Life Insurance, Policybazaar.com)