Let us assume that Prabhu is a small business owner in India’s metro city, Bengaluru. He earns Rs.25 lakhs per year. Prabhu is married and the sole breadwinner with his dependent parents, a wife, and a daughter. As he grew older, his perspective was to save as much as possible to establish a fund for their daughter’s schooling. Along with this goal, he also wants to safeguard his family’s financials if something happens to him in the future.
What should Prabhu do? The experts here will say that he should opt for life insurance plans that have tax saving benefits and investment, plus he will get a life cover at a meager cost. Doing this, he is saving money for his daughter and protecting family financials in the form of the life cover he’s getting.
Let us quickly get to why tax savings is significant and the how-to save tax.
Why do you want to save money on taxes?
Saving taxes does not mean avoiding your contributions to the nation’s growth. However, it is about planning that portion of the expense that might otherwise benefit you and your family by investing in another plan. Essentially, from January to March, people rush to save taxes using several investment products.
However, if you want to avoid last-minute worry and seeing your money drain unnecessarily in the name of taxes, you should prepare ways to save taxes ahead of time like:
- Save your income from tax deductions by purchasing investment products. In January, February, and March, your company’s human resources department may deduct a portion of your compensation. To save the money, make sure you submit all necessary documentation proving that you have met your income tax obligations.
- Save tax and grow wealth by planning ahead of time for tax savings through life insurance plans. Purchasing plans at the last minute can only help you save taxes. On the contrary, performing this task on time would save you money only.
- Purchase the best insurance plan to save money on taxes: The goal is to save money on taxes, which can be accomplished by purchasing an insurance policy. A life insurance policy can protect you in the way you want, but only if you properly research all the available alternatives. Term insurance, for example, can help you save taxes while also allowing you to construct a fund for your family in the event of an unfortunate incident. The money collected will assist the family’s dependents to manage expenses when you are not present to care for them. As a result, the term plan allows you to save tax deductions while also achieving your goal of saving money. ULIPs, on the other hand, help you grow your wealth by investing it under market-related schemes, plus give you additional life cover to the policyholder.
How Can Life Insurance Policies Help You Save Money on Your Taxes?
A life insurance policy ensures that the beneficiary will benefit if the policyholder dies within the policy period and all premiums have been paid. You can also apply for a tax exemption under section 80C of the Income Tax Act of 1961 if you own an insurance policy. You can also request tax savings on the maturity amount under section 10(10D) of the Income Tax Act, in addition to tax savings on premiums paid.
Individuals, essentially taxpayers, buy life insurance policies and make investments to claim these deductions. The policy can be purchased for self, spouse, dependent parents, and childrens. The deductions allowed for every individual are different.
| Eligibility | Deduction under Section 80D |
| Health insurance for individual, spouse, children (below 60 years) | Up to Rs.25,000/- |
| For Individuals and parents both below 60 years | Up to Rs.50,000 (Rs.25K+Rs.25K) |
| For individual below 60 years and senior citizen parents | Up to Rs.75,000 (Rs.25K+Rs.50K) |
| For Individual and parents (both above 60 years) | Up to Rs.1,00,000 (Rs.50K+Rs.50K) |
Different tax benefits that you receive under life insurance policies to save taxes are:
- Section 80 C: The section lets you claim tax benefits on premiums paid for your spouse or your children. The maximum tax exemption permitted is Rs.1.5 lakhs. The cover amount and premium can be increased, but the exemption limit is fixed.
- Section 10 (10D): The maturity benefits earned under various life insurance policies are tax-free, subject to the restrictions of Section 10(10D) of the Income Tax Act (1961).
- Section 80 CCC: You can get tax benefits on premiums paid for pension policies up to Rs.1,50,000/-. However, if you surrender the plan, the pension/annuity will be taxed following current tax regulations.
- Section 80 D: The following are the maximum tax benefits obtained under Section 80D:
- Up to 25,000 in premiums paid for yourself, your spouse, or your dependent children are tax-deductible.
- For covering parents, there is an additional tax benefit on health insurance premiums paid up to 25,000.
What are popular life insurance policies that people buy to save tax?
These are the popular tax saving life insurance policies that individuals can buy to save taxes:
1. Buy a Term Plan.
A term plan is the purest form of life insurance, providing coverage for a set period. The nominee pays the sum assured if something goes wrong to the life insured during the policy term. As a result, the term plan is the most cost-effective life insurance policy because it provides substantial coverage for a low premium.
2. Buy a ULIP Plan.
ULIPs are purchased by those who want to save money on taxes and invest wisely. A ULIP is a life insurance policy with both life insurance and fund investment options to invest your funds into market-related schemes. Individuals can select an investment or swap between funds with ease. You can invest in ULIPs based on your risk absorption capacity. With this plan, your premiums grow concerning market trends with time and thus is a better option for some people.
3. Buy a Savings Plan.
Those who aspire to have a nice home, a car, or travel abroad purchase a savings plan. By paying a single premium for the rest of your life, these life insurance products help you save money.
Individuals can use savings plans to suit their financial needs by investing according to their risk appetite. If you die during the term of the savings plan, the death benefit will be paid to your dependents. Savings plans, like other life insurance policies, provide tax advantages.
4. Buy a Pension Plan.
A pension plan, often known as a retirement plan, supports individuals after their active income ends. It is a fantastic financial assistance system that allows you to pay for regular costs as well as an emergency. Pension plans assist families in the event of the policyholder’s death. If you die while the insurance is active, the coverage will help your dependents recover financially.
5. Child Plans:
You want to save money for your child’s future but cannot do so. Purchase a child life insurance policy to financially safeguard the child’s future even if the parents cannot support their child’s growth. Pre-defined rewards are made available under this plan at critical life milestones.
6. Health Plans:
Section 80D allows health plans to keep tax deductions. It enables you to care for your parents’ health when you cannot afford the escalating medical costs of treatment. Health insurance companies will give you a lump sum if you are diagnosed with a critical illness.
Conclusion
Life insurance policies are a great tool to claim for tax deduction and reap the policy’s advantages. However, consider your tax liabilities based on your income bracket before purchasing life insurance plans. Consult your tax expert if you are unaware what nature of insurance can lower your tax liability.