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Insurance and Taxes

What Is Insurance?

Insurance is a contract (in the form of a policy) between you and an insurance company, whereby the company agrees to compensate you for any financial loss(es) arising from specific insured events. In exchange for the financial protection extended to you, you agree to pay a certain sum of money, known as premiums, to the insurance company. Insurance is the best form of risk management, designed to hedge against the risk of uncertain loss.

There are various types of insurance one can choose from – life insurance, health insurance, motor insurance, property insurance, business insurance, etc. Besides the financial protection you derive from insurance, you can also claim tax benefits on the premiums that you pay.

What Are The Tax Benefits Associated With Insurance?

Having a life insurance policy and health insurance policy in this day and age is a must. To increase its appeal, the government has allowed tax deductions to be claimed on the premiums that you pay on both types of policies.

Life Insurance - Tax Advantage

In a life insurance policy, the insurance company promises to pay a certain sum of money (known as sum assured) to the nominee(s) of the insured individual should the individual pass away during the policy period. If the individual outlives the policy period, some policies, more specifically endowment, money back, wholelife policies, pay out maturity benefits to the insured individual.

  • Section 80C: Premiums paid on a life insurance policy like endowment, whole life, money back policies, term insurance policies and Unit Linked Insurance Plans – qualify for tax deduction under Section 80C of the Income Tax Act, 1961. The maximum deduction that can be claimed is Rs. 1,50,000.

Tax deduction under Section 80C of the Income Tax Act, 1961, on life insurance can be claimed for premiums paid toward insuring self, spouse, dependent children and any member of Hindu Undivided Family. An important point to be noted is that if the policy is issued on or prior to March 31, 2012, annual premium up to a maximum of 20% of the sum assured becomes tax deductible. For insurance policies issued on or after April 1, 2012, annual premium up to a maximum of 10% of the sum assured is tax deductible.

  • Section 80CCC: Tax deduction under Section 80CCC of the Income Tax Act, 1961, can be claimed for amount paid towards any annuity plan of Life Insurance Corporation of India or other insurance companies for the purpose of receiving pension. The maximum deduction that can be claimed under this section is Rs. 1,50,000.

  • Section 10(10D): Section 10(10D) of Income Tax Act exempts you from paying taxes on the amount that you receive from the life insurance provider. Under this section, the amount of sum assured and bonus (if any) received on maturity or surrender of policy or on death of the life assured are completely tax free in the hands of the receiver, subject to certain conditions.

Health Insurance - Tax Advantage

In a health insurance policy, the insurance company will cover the cost of an insured individual's medical and surgical expenses in the event the individual falls ill or gets injured.

  • Section 80D: Tax deduction under Section 80D of the Income Tax Act, 1961, can be claimed for premiums paid toward a health insurance policy. The total deductions that can be claimed under Section 80D are as under:
Members InsuredTotal Deduction
Self and familyRs. 25,000
Self and family + ParentsRs. 50,000 (Rs. 25,000 + Rs. 25,000)
Self and family + Parents (senior citizens)Rs. 75,000 (Rs. 25,000 + Rs. 50,000)
Self (senior citizen) and family + Parents (senior citizens)Rs. 1,00,000 (Rs. 50,000 + Rs. 50,000)

Note:

i) A tax deduction of up to Rs. 5,000 can be claimed for expenses borne on medical check-ups or preventive health check-ups within the above limits.

ii) The tax deduction for senior citizens has been raised to Rs. 50,000 from Rs. 30,000 for FY 2018-19 (Announced in Budget 2018). Tax benefits under Section 80D can also be claimed for premiums paid toward health insurance riders and critical illness insurance policies. It must however, be noted that premiums paid for personal accident policies or personal accident riders do not qualify for tax deduction under this section.

Conditions Associated with Claiming Tax Benefits on Life Insurance and Health Insurance Policies

  • Although you can make premium payments in cash for your health insurance policies, you will however, not be able to avail tax benefits on it as the income tax rules disallow tax deductions on premiums paid via the cash mode. It is thus recommended that you choose to pay premiums through cheque, internet banking, draft or credit card to enjoy the tax advantage on premium. Cash payments for preventive health check-ups are eligible for tax deduction under Section 80D.

  • To claim tax deduction under Section 80C, make sure that the premium paid during the financial year does not exceed 10% of the sum assured. If it crosses this figure, it should be noted that the benefits you can claim will be limited up to 10% of the sum assured. In case of Section 10(10D), tax exemption is subject to premium not surpassing 10% of the sum assured.

  • Tax deductions under Section 80C and Section 80D can be claimed only for those years that you have paid the premiums. In case you have opted for a single premium life insurance policy, you can only claim tax benefits under Section 80C once - which will be the year you pay the premiums.

FAQs

What is life insurance?

In a life insurance policy, the insurance company promises to pay a certain sum of money (known as sum assured) to the nominee(s) of the insured individual should the individual pass away during the policy period. If the individual outlives the policy period, some policies, more specifically endowment policies, pay out maturity benefits to the insured individual.

What is the maximum tax deduction that can be claimed under Section 80C?

The maximum tax deduction that can be claimed under Section 80C of the Income Tax Act, 1961, is Rs. 1,50,000.

What are the tax benefits of life insurance?

Premiums paid on a life insurance policy – endowment policies, term insurance policies and Unit Linked Insurance Plans, etc. – quality for tax deduction under Section 80C of the Income Tax Act, 1961. The maximum deduction that can be claimed under this section is Rs. 1,50,000.

Section 10(10D) of Income Tax Act, 1961 exempts you from paying taxes on the amount that you receive from the life insurance provider. Under this section, the amount of sum assured and bonus (if any) received on maturity or surrender of policy or on death of the life assured are completely tax free in the hands of the receiver, subject to certain conditions.

What is health insurance?

In a health insurance policy, the insurance company will cover the cost of an insured individual's medical and surgical expenses, in the event the individual falls ill or gets injured.

Which section of the Income Tax Act deals with the tax benefits of health insurance?

Tax deduction under Section 80D of the Income Tax Act can be claimed for premiums paid toward a health insurance policy. Tax benefits under this section can also be claimed for premiums paid toward health insurance riders and critical illness insurance policies. It must however, be noted that premiums paid for personal accident policies or personal accident riders do not qualify for tax deduction under this section.

Are health insurance premiums paid through all the modes eligible for tax deduction under Section 80D?

No, tax deduction under Section 80D of the Income Tax Act cannot be claimed in case you pay the premiums in cash.

Although you can make premium payments in cash for your health insurance policies, you will, however, not be able to avail tax benefits on it as the income tax rules disallow tax deductions on premiums paid via the cash mode. It is thus recommended that you choose to pay premiums through cheque, internet banking, draft or credit card to enjoy the tax advantage on premium. Cash payments for preventive health check-ups are eligible for tax deduction under Section 80D.

Who is eligible to claim tax benefits under Section 80D?

You can avail tax deduction under Section 80D of the Income Tax Act, 1961, if you have paid health insurance premiums for yourself, your spouse, children or parents.

How much tax benefits can be claimed on health insurance?

Tax deduction under Section 80D of the Income Tax Act can be claimed for premiums paid toward a health insurance policy. The total deductions that can be claimed under Section 80D are as under:

Members InsuredTotal Deduction
Self and familyRs. 25,000
Self and family + ParentsRs. 50,000 (Rs. 25,000 + Rs. 25,000)
Self and family + Parents (senior citizens)Rs. 75,000 (Rs. 25,000 + Rs. 50,000)
Self (senior citizen) and family + Parents (senior citizens)Rs. 1,00,000 (Rs. 50,000 + Rs. 50,000)

Note - A tax deduction of up to Rs. 5,000 can be claimed for expenses borne on medical check-ups or preventive health check-ups within the above limits.

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