Saving money is an art but saving tax is even a greater art. Who doesn’t want to save tax? We all do, by all legitimate means possible.
At the end of every year, that’s what we run around for. Evaluate our savings and plan to claim tax benefits on the relevant ones.
One of the most common tools to save your tax is the premium that you pay for your life insurance policy.
We all know the annual premium amount for life insurance policy is eligible for tax deduction under Section 80C.
But is it so simple? For your information, there are conditions attached to it that must be fulfilled in order to claim tax benefits.
Tax rules you must know
1.There is a limit on the premium amount that is eligible for tax deduction. For the policies that were issued on or before March 31, 2012, maximum premium amount eligible for deduction is only 20% of the total sum assured. Anything in excess to that does not stand eligible for deduction under Section 80C
2.The maximum premium amount eligible for deduction for the policies issued on or after April 1, 2012 is only 10% of the total sum assured. For example, you buy an insurance policy for the sum assured of 10 lakhs. Remember, the maximum annual premium amount eligible for deduction will be only 1 lakh (ten percent). Anything exceeding 1 lakh cannot be claimed for tax benefits. However if an individual is suffering from an ailment listed under Section 80DDB or has a disability listed under Section 80U, an additional premium deduction of 5% is permitted. Therefore for these individuals, the maximum premium eligible for deduction under Section 80C is 15%
3.Premium amount paid for other than children, spouse and self will not be eligible for deduction
4.Upon maturity of the policy, if an individual satisfies all the above criteria, the maturity benefits stand exempted from tax. But if the annual premium exceeds the percentage limit as mentioned above, tax will be levied as suitable in accordance with the income tax slab
5.In the event of death of the insured person, the death benefits are not taxable
The good news is that term life insurance plans are not much affected and there are a variety of these plans available in the market, wherein the sum assured is much higher than the annual premium. So you don’t need to worry before buying one.
However, you need to beware before buying single premium insurance policies. As a part of these policies the sum assured is not kept high in order to enhance the returns.
Therefore the premium amount set for these plans falls low, creating not enough percentage difference between sum assured and the premium.
For such plans, the sum assured is not more than 1.5 times the premium amount. As a result single premium plans don’t meet the requirements for tax deduction.
A life insurance product demands a long term commitment, which may last a couple of years.
You don’t want to discover right in the middle of your policy tenure that you have made a wrong decision where in your premium amount will not be eligible for tax deduction.
It will be too late then. Even cancellation of your policy may charge you unexpected taxes. So take time in studying tax laws diligently pertaining to life insurance policy before buying one.
Curated from Tax Laws and Term Life Insurance