Dual Benefit of Insurance:Investment & Tax-saving

Written on Monday, July 4, 2016
By Tax Solution Group - Bajaj Capital

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Insurance policies have a dual benefit of insuring your life and also giving you significant tax benefits in the form of deductions for premiums paid and tax free maturity amounts. Insurance is hence a win-win situation for people since it takes care of a steady earnings, security for the family as well as tax savings.

Buying insurance can be a good idea for not only the young but middle-aged people as well. What kind of insurance you buy is an important aspect to consider based on your present requirement and future financial goals. Though the tax saving could not be the main reason for buying the insurance policy nevertheless it is one of the important aspect of all your financial decisions.


Tax Benefits of Life Insurance

Premium paid for a life insurance policy qualifies for a tax deduction under Section 80C of the Income Tax Act. Maximum amount of deduction allowed under Section 80C is Rs 1.50 lakh in a financial yea. Further Section 10(10D) makes maturity claims of insurance policy completely tax-free. But one should be very cautious before surrendering the insurance policy anytime before 2 years and 5 years from the date of its issue, respectively for traditional and ULIP policies respectively, the tax deduction claimed earlier will get reversed in such cases and you may have to pay the taxes on the amount reversed.

Tax deduction on life insurance can be claimed only by an individual or a Hindu Undivided Family (HUF). Even a non-resident or a foreign national can claim deduction for premium payment towards life insurance. Benefits of tax deduction are available on all kinds of life insurance policies --- pure term cover, traditional policy or a unit-linked plan.
An individual can take life insurance policy on his own life, or on the life of spouse and child. In case policy is issued after April 1, 2012 it will qualify the tax deduction u/s 80C only if the premium paid does not exceed 10% of sum assured (15% in case of a person suffering with specified disability or disease). For policies issued before this date, premium should not have exceeded 20% of the sum assured.


Tax Benefits for Health Insurance
Tax deduction for premium payment towards health insurance qualifies under Section 80D of the Income Tax Act. Premium payment made towards a health insurance policy for self, spouse, dependent children will get tax deduction of up to Rs 25,000. If the insurance policy is taken in the name of a senior citizen, be it self (including spouse and dependent children) or parents then you will get a tax deduction of Rs 5,000 more and hence the total deduction goes up to Rs. 30,000 in case of senior citizens.

Only Mediclaim and critical illness policies qualify for deduction under Section 80D of the Income Tax Act. Premium payment for personal accident policies does not qualify for tax deduction.

Only an individual or HUF can claim deduction under Section 80D. The person can be a resident or even a non-resident. Hence NRIs or even foreign citizens qualify to claim deduction for health insurance.

Health insurance premium has to be paid in a mode other than cash (i.e. by Cheque/DD/Online transfer) to claim the deduction.


Dual benefit of insurance and tax saving
The biggest advantage of insurance policies is that they provide dual benefit of investment and insurance making them one of the preferred investment options.

While pure term plans cover risk of death and health policies cover hospitalisation, investments plans, the most favourite ones, offer long-term investment and allow one to receive a lumpsum at the time of maturity. This ensures an individual does not have to run around for investment and tax-saving. They will get it in one place and one product. That is why most people prefer insurance policies over other products tax saving invesments.
If for some reason, one ceases to pay the premium after a set minimum number of years, then the policy gets converted in a free paid-up policy with reduced sum assured, subject to certain conditions. In case the policyholder survives the policy term, amount of sum assured and additional bonuses accumulated during the term are received by the policyholder himself. In case, the policyholder expires during the policy term, the death benefits are paid to the nominees including full sum assured and additional vested bonus.

Insurance also offers other benefits like the option to add accidental riders to further enhance the cover by paying a marginal premium.

To conclude, insurance has many benefits, tax-saving being the important one. Individuals can choose to buy insurance as a tool to save tax.


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