Tax Benefits on Child Insurance Plans

Nothing tops the world of financial investments for children than a child insurance plan. If you are a parent who won’t settle for anything less than a secure investment for your child’s future, then this article is for you. Child insurance plans offer plenty of benefits. One of the primary factors of this investment plan is the taxation benefits it offers. This post covers the tax benefits of child insurance plans and how you can avail of those benefits. Clarification of some general doubts and questions are also available.

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What are Child Insurance Plans?

Child insurance plans are policies that cover the future needs of your child’s career, marriage, education, etc. They offer the dual benefits of investment and insurance. Similar to a ULIP, most child plans offer a three-way benefit. The different benefits of a child insurance policy are death, maturity, taxation, and rider/add-on benefits.

Child plans will secure your child’s finance in your absence. The plan takes care of itself to enable your child’s future needs. The idea depends on the corpus building as part of an investment. A child’s investment plan is the best financial gift you can give your child.

What are the Tax Benefits on Child Insurance Plans?

The primary tax benefits that get covered in child insurance plans are as follows:

  1. Tax Benefit on Premiums

    This benefit comes under Section 80C of the Income Tax Act of 1961. Here you can avail of tax benefits up to a sum of Rs. 1, 50,000 annually. The tax exemption is on the annual premium payments you make on your policy. 

    If you are in the highest bracket of 30%, you can save a maximum of Rs. 45,000 per year in tax. The deduction directly applies to your income tax amount on the premiums paid towards the child plan. It is an added advantage that helps you focus on the current financial priorities.

  2. Tax Benefit on Income from the Plan

    If you make an income from your child insurance policy, you can avail of tax deductions. The benefits apply to you under Section 10 (10D) of the Income Tax Act.

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  3. Tax Benefit on Maturity

    The tax benefits on the maturity amount also come under Section 10 (10D). They apply to the maturity benefits that your policy collects during the term. You could receive the maturity benefit after the policy term expiry. Your child or nominee will receive it in the unfortunate eventuality of your death. 

    The maturity proceeds from these plans are tax-free. You can think of it as a pure saving product as there is no tax on the full maturity amount.

  4. Tax Benefit from Treatment

    If your child has special needs, you can claim a tax deduction from the annual income. You can claim up to 33% of the tax benefits for money spent on the child’s treatment. You can find this deduction scheme under Section 80DDB.

    Child disability is also another section that attracts tax benefits. You can claim up to 40% of the tax deduction for a minor disability. For a major disability, the claim on the tax deduction increases to 80%. Section 80DD of the Income Tax Act covers this benefit.

  5. Tax Benefit on Loans for Higher Education

    If you take higher education loans for your child against the insurance policy, tax deductions are available. As per Section 80E of the Income Tax Act, the interest you pay on a loan attracts tax benefits. The loan purpose should be only for your child's higher education requirements.

  6. Tax Benefit on Fund Formation

    This scheme is a concept where you can form a new, separate fund for your child. You can set up this fund in correspondence with the existing investment plan. However, you should not claim any amount from the fund before the child’s higher education goals are in motion. You can actively receive partial tax deductions from this fund.

  7. Tax Benefit on Tuition Fees

    It is an exclusive tax benefit that helps you receive a deduction on tax under Section 80C. You can claim tax deductions of up to Rs. 1, 00,000 annually on your child’s tuition fees. This tax exemption works only for two children or fewer. 

    The tuition fees should come under a specific bracket as per regulations. You cannot avail of this tax benefit for higher sums of tuition fees.

    *Tax benefit is subject to changes in tax laws. Standard T&C apply.

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How to Avail of the Tax Benefits Under Child Insurance Plans?

There are no specific steps you need to follow for receiving tax benefits on a child insurance plan. All the tax benefits that are a part of any policy are available under the terms & conditions of the plan. 

For example, you will receive the tax benefits on maturity benefits when a policy’s maturity term comes of age. 

All other tax benefits follow the same procedure. Your job is to get clarification regarding the tax benefits within the policy you purchase. You can do the research yourself or contact a financial advisor. When you complete the policy purchase, possess a general idea of how the taxation benefits will add to your plan over time.

You can prepare your child with the information as well. Enable them to have an excellent overview of how the benefits work. The tax benefits work according to the Income Tax Act and the Government regulation formalities.

*Tax benefit is subject to changes in tax laws. Standard T&C apply.

In Conclusion

You should not invest in a child insurance plan depending on the taxation benefits alone. Ensure the credibility of the plan for supporting your child’s future goals and aspirations. The tax benefit is a bonus that you can think about in detail during the policy purchase. The primary concern should always be how the investment helps to meet the financial needs of your child.

FAQ's

  • Which is the best type of child insurance plan to receive tax benefits?

    All child plans provide tax benefits. If you are keen on receiving the maximum tax benefits from your insurance policy, the optimum method is to opt for a child education plan. They offer significant tax benefits for your policy.
  • Does the tax benefit vary according to the financial goal that the policy covers?

    No. The financial goal and your child’s future needs are independent of the tax benefits. Taxation is an added benefit that you receive as part of the policy benefits.
  • Is any further action needed from me to ensure I get tax benefits?

    No. When you sign up for a child plan, the terms & conditions will include tax benefits. You should check these policy terms first before purchasing the plan. Once you buy it, the benefits associated with the policy, including tax benefits, are yours.
  • Do I get to choose the tax benefits for my insurance plan?

    You can choose the child insurance plan relying on the various benefits it offers. However, you cannot choose the taxation policy. The policy issuer provides these features per the Income Tax Act & Regulations.
  • Can I use my child insurance policy to avail of taxes excluding the income tax?

    The child insurance plan covers tax benefits that are related to income tax. No other tax type is a part of the benefit category for the child’s policies.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
#The lumpsum benefit is calculated if policyholder invested ₹10000 monthly for 10 years in the fund with a policy term of 20 years. This Point To Point past performance data of last 10 years has been used to illustrate a scenario for the customers benefit. It is assumed that the past 10 years returns would have also been delivered in last 20 years. This is not guaranteed and not in anyway indicative of what the customer may actually get 20 years from now. The investment is subject to market risk and the risk is borne by the policyholder.
+Returns Since Inception of LIC Growth Fund
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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