It is not unnatural to be in doubt when it comes to understanding tax-deductions, especially for the different kinds of insurance policies you might have. Know the difference, it's simple!
Shalini was perplexed. She had recently paid premiums for renewing her life and health insurance policies and had to provide details to her employer for calculating taxes. But she was not sure of the tax deduction limits on life and health insurance policies. She was also not sure of the maximum deduction she could claim under the policies she had purchased.
Shalini is not alone. Life and health insurance are two separate policies and are governed by separate tax rules under the Indian Income Tax law. For a layperson, it can become very difficult to interpret tax provisions and make the right claim in filing for tax-returns. So let’s clear these doubts on the difference between tax deductions for life and health insurance.
Provisions in the Income Tax Act
You can claim the premium paid for the life insurance policy under Section 80C of the Income Tax Act. When it comes to health insurance, Section 80D of the Income Tax Act governs the deductions on premium for the policy.
Tax deduction on Life Insurance
Here are the main conditions for claiming tax deduction for life insurance premium under Section 80C of the Income Tax Act:
Only an individual or a Hindi Undivided Family can claim a deduction. They can be residents or non-residents. The individual could be either Indian or a foreign origin.
The maximum amount of deduction possible under this section for all insurance/investment avenues (including life insurance premium) is Rs. 1,50,000 for a financial year.
An individual can take life insurance policy on one’s own life, or on the life of one’s spouse or children.
The policy can be either pure term insurance, a traditional plan or a ULIP plan.
For a policy issued on or before March 31, 2012, deduction is restricted to 20% of the capital sum assured. In case of policies issued on or after April 1, 2012, the same is restricted to 10%. In case of a policy taken on or after April 1, 2013 in the name of any person suffering from disability referred to in section 80U or suffering from an ailment as given in section 80DDB, the deductions are limited to 15% of the capital sum assured.
In case of traditional and ULIP life insurance plans, the tax deductions claimed will get reversed if the policyholder surrenders the insurance policy before 2 years and 5 years respectively.
Tax deduction on Health Insurance
Only an individual or Hindu Undivided Family can claim deductions under Section 80D. The person can be a resident or even a non-resident. So, NRI's or even foreign citizens qualify to claim deduction for health insurance.
Only mediclaim and critical illness policies qualify for deduction under Section 80D of the Income Tax Act. Premium for personal accident policies do not qualify.
Payments made as premium for health insurance policy, Central Government Health Scheme (CGHS) or as cost of preventive health check-up qualify for deductions.
- The payments can be made for one self, or for one’s spouse, dependent children (irrespective of the number) or parents (dependent or not).
- Health insurance premium has to be paid in a mode other than cash to claim the deduction. However, payments made on account of preventive health check-up can be made in cash.
- Deduction under Section 80D is available on “payment basis” i.e. in the year you’ve made the payment, irrespective of which year it relates to.
- Premium of such a policy which can be attributed towards the critical illness rider, in case the life insurance policy qualifies for a deduction under section 80D. Note that premium for accident rider does not qualify under the section.
Deductions Available under section 80D
|For Whose Benefit Payment Can be Made||Self, Spouse and Dependent Children||Parents|
|Mediclaim insurance premium||Rs. 25,000||Rs. 25,000|
|Preventive health check-up||Rs. 5,000 (included in the limit above)||Rs. 5,000 (included in the limit above)|
|Additional Deduction (in case policy is taken on the life of senior citizen)||Rs. 5,000||Rs. 5,000|
Section 80C & 80D: The Fine Line
On the basis of the facts presented so far, it is clear that there are finer lines of difference between the provisions provided under the sections 80C and 80D. If you haven’t been able to notice them, here’s a short summary:
|Particulars||Section 80C (Life Insurance)||Section 80D (Health Insurance)|
|Coverage of parents||Not covered||Covered|
|Coverage of children||Covered whether dependent or not||Covered only if dependent|
|Maximum limit of education||Rs. 1,50,000||Rs. 25,000 (Additional Rs. 5,000 if parent is senior citizen)|
|Payment mode||No restriction||For premium, other than cash|
|Reversal of deduction||Yes, in case of surrender of policy||No such provision|
|Deduction available on payment basis||No such provision||Yes|
|Critical illness rider for life insurance policies||Cannot be claimed here||Can be claimed here|
Also read: Tax Deduction on Health Insurance
A Little Note
It is more than important to understand the available provisions when claiming tax and filing for tax returns. By claiming higher deductions than what is allowed, even out of complete ignorance or mistake, may cost you additional tax, interest and penalties. Also, since these tax provisions are dynamic, one must make an effort to stay updated about the amendments introduced in the Income tax act year on year.