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GENERAL

Tax Savings with Insurance Policies: Planning It Right

Rashmi Ghosh Rashmi Ghosh 30 November 2018
5.0 (3 votes)

Insurance policies contribute to the dual benefit of meeting your long term financial objectives and also act as a tax saver. Be it term insurance, health insurance, life insurance or unit linked insurance plan, they all offer varied tax benefits.

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Here’s a must-read on the host of tax benefits that you can avail on your insurance policies in the approaching tax season.

Tax Benefits on Term Insurance Plans

Section 80C of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Applicable to individuals and Hindu Undivided Families (HUFs) – individual assessees refer to the individual himself, the husband/wife of the individual assesse or children of individual assessees.

  • For HUFs, tax deductions can be claimed on premiums up to a maximum of 20% of the pre-decided sum assured when the premium paid by an assessee during a financial year exceeds 20% of the sum assured on policies bought before 1st April 2012.

  • Tax deductions can be claimed on premiums up to a maximum of 10% of the pre-decided sum assured on policies bought on and after 1st April 2012.

  • Under Section 80C of the Income Tax Act 1961, an assessee can avail tax deductions up to Rs. 1.5 lakh.

Section 10(10D) of the Income Tax Act, 1961: Tax Benefits & Eligibility

Any sum against life insurance policies received by the assessee, including bonuses, attracts tax exemptions. The scenarios under which tax is exempted are:

  • Death benefit received under a life insurance policy

  • Any sum that an individual assessee receives from an insurance company on insurance of a dependent handicapped member under Section 80DD(3) of the Income Tax Act, 1961.

  • Any sum that an individual assessee receives from an insurance company when a dependent, or a member of family is suffering from a notified disease [under subsection (3) of section 80DDA].

  • Any sum that an individual assessee receives through a Keyman Insurance Policy

  • Any sum that an individual assessee receives against an insurance plan, except Death Benefit, that has been

    • issued to him/her on or post 1st April 2003

    • issued on or after April 1st, 2003 but before April 1st, 2012 - Exemption available only when annual premium payable exceeds 20% of sum assured.

    • issued on or after 1st April 2012 - Exemption available only when annual premium payable exceeds 10% of sum assured.

    • issued on or after April 1st, 2013 for a disabled person referred to in Section 80U or a person with disease or ailment specified in section 80DDB – Exemption available only when annual premium payable exceeds 15% of sum assured.

Tax Benefits on Health Insurance Plans

Section 80D of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Tax deductions of up to Rs.25,000 on health insurance plans for families, which comprises of the policyholder, his/her spouse and parents.

  • Health insurance plans for senior citizen parents are eligible for tax deductions of up to Rs.30,000 on the gross taxable income. This sum has been increased to Rs.50,000 for the Assessment Year 2019-20.

Section 80DD of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Tax deduction of up to Rs.75,000 can be availed on premiums for a handicapped dependent relative when the disability varies between 40% and 80%

  • Tax deduction of up to Rs.1,25,000, based on the total medical expenses, can be availed on premiums for a dependent relative who is severely handicapped

Section 80DDB of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Tax deductions under this section are applicable on medical expenditures incurred on the treatment of certain ailments, as specified in your policy document. These ailments usually include malignant cancer, neurological diseases, Parkinson’s disease, AIDS, chronic renal failure, thalassemia, certain neurological diseases, haematological disorders, etc.

  • Tax deduction for these illnesses is applicable for up to Rs.40,000. For senior citizens, the maximum tax deductions that can be claimed is Rs.60,000, which is supposed to be increased to Rs.1,00,000 for the Assessment Year 2019-20.

  • For medical treatment of a very senior citizen, the maximum tax deduction that can be claimed is Rs. 80,000, which has been increased to Rs.1,00,000 for the Assessment Year 2019-20.

Section 80U of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Tax deduction of up to Rs.75,000 can be availed for disability of more than 40%. The maximum tax deduction eligibility under this section cannot exceed Rs.1.25 lakh

Tax Benefits on Life Insurance Plans

Section 80C of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Tax deductions applicable under this section ranges to a maximum of Rs.1.5 lakh

  • Individual assessees as well as HUFs can avail tax deductions under this section on their investments in life insurance plans

  • Tax deductions on premium payments up to 20% of the sum assured is applicable on policies issued before 31st March 2012; and, up to 10% of the sum assured on policies issued on or post 1st April 2012

  • Maximum deduction applicable for disabled individuals, as mentioned in Section 80U, or suffering for illnesses, as specified in Section 80DDB, is a maximum of 15% of the sum assured

Section 10(10D) of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Death Benefit paid to the beneficiary in the policyholder’s demise or Maturity Benefit, including bonuses, paid to the policyholder as a survival benefit attracts tax exemptions under this section on certain terms and conditions.

  • Sum assured received, with the exception of Death Benefits, are not exempt from taxes for policies issued on or post 1st April 2003 but on or before 31st March 2012.

  • For policies issued on or post 1st April 2012, deductions will be applicable only when the total premium amount is not more than 10% of the sum assured.

  • Maximum limit for deductions on premiums cannot be less than 20% of the total sum assured.

  • Sum received under Section 80DDA(3) or Section 80DD(3) is not exempt from taxes, except on certain terms and conditions.

Section 80D of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Tax benefits are applicable on inbuilt or additional health benefit riders like Critical Illness Rider, Hospital Care Rider, Surgical Care Rider, etc.

Unit Linked Insurance Plan (ULIP)

Tax deductions for ULIPs offer dual benefits - one, during investments and maturity, and second, at the time of insurance or retirement benefits.

Section 80C of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Individuals and Hindu Undivided Families can avail tax benefits.

  • Maximum tax deductions that can be availed is up to Rs.1.5 lakh on annual premium payment(s).

  • Tax benefits cannot be availed on ULIPs discontinued before the completion of 2 years.

  • Premium payments for a retirement scheme is eligible for tax deductions of up to Rs.1.5 lakh under sub-section 80CCC and is applicable to individual taxpayers only.

Section 80C of the Income Tax Act, 1961: Tax Benefits & Eligibility

  • Tax deductions are applicable on premium amounts up to a maximum of 10% of the pre-determined sum assured as a Maturity Benefit or on the amount received on partial withdrawal.

  • Tax deductions on premium payments for policies bought on or before 1st April, 2012 are restricted to up to 20% of the sum assured.

  • Any sum received as pension from an annuity plan or any sum received after the surrender of ULIP is taxable.

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Rashmi Ghosh
Written by Rashmi Ghosh
Digital enthusiast, dreamer with a colourful mind and shares her soul with canines. She survives on coffee, and food and travel feature among her topmost priorities.