How to Save Tax through Insurance Policies?

Your tax saving plans are important aspects of your financial planning for a particular year. Ideally, your tax saving strategy should be such that it helps you save tax with insurance as well as build your corpus. To serve this dual aim, it is most effective if you invest in insurance policies. It is a sensible idea to invest in insurance of various kinds, which will strengthen your insurance portfolio and secure your future, besides helping you save take advantage of life insurance tax benefit.

Life Insurance

Life insurance is considered as the most important insurance cover that people generally invest in to secure the future of the family in the absence of the primary bread winner. In that order you should invest in a life insurance policy to ensure that the well being of your spouse and children is not compromised upon your demise. Life insurance premiums are deductible, and come with life insurance tax benefit as per Section 80C of the Income Tax Act.

You can take your pick from an array of life insurance policies that include term insurance plans, endowment plans, money back plans or ULIP plans, all of which will allow you to save tax with insurance.As per Section 80C, the premiums that you pay towards the life insurance policy is deductible up to a maximum of Rs 1.5 lakhs.

Additionally, the proceeds received upon death of the policy holder or upon maturity are tax free under Section 10(D). Alongside, you must note that in case the policy is terminated before five years, the deductions claimed under life insurance tax benefit are included in your income and tax is accordingly calculated.

Health Insurance Plans

To complete your insurance portfolio, it is necessary that you buy a health insurance policy keeping in mind the rising health care and hospitalization costs—and chances are that it would keep escalating with each passing year. It is of utmost importance that you buy a health insurance plan not only to save tax but primarily to cushion yourself in times of life threatening critical illnesses and accidents. Alongside, it serves the purpose of a useful tax saving instrument.  Health insurance is covered under Section 80D of the Income Tax Act.

The maximum amount of premium deductible from your health insurance is Rs 15,000 if you are under 60 years old. However, if you are a senior citizen, you are eligible for tax benefits up to a maximum of Rs 20,000. Also, the amount on maturity is tax free if it is falls under the critical illness policies. If you have two healthcare insurance plans in the family, one for your own family and one for your elderly parents, you can available tax benefits up to a maximum of Rs 35,000. 

Pension Plans

While life and health insurance help plug the most crucial loopholes in the financial security of your family in times of unprecedented events, investing in a pension plan will further add to your security blanket and also provide you tax benefits under Section 80CCC(a sub-section under Section 80C) of the Income Tax Act.

Pension plans also known as annuity plans are similar to life insurance policies.However, unlike a life insurance policy, which is a protection plan and is aimed to take care of your family following your death, a pension plan looks to ensure a financially sound future for yourself and your family with a steady stream of income when you survive and live through your retirement years.

Although you can save tax with insurance, maximum limit of deduction under the sub-sections of Section 80C cannot be in excess of Rs 1.5 lakhs. Also, upon maturity, tax is charged on 2/3rd of the amount at a marginal rate while the remaining part of the total pension amount is tax free. However, if the beneficiary dies, the amount is tax free.

Written By: PolicyBazaar - Updated: 23 September 2020
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
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