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How Does Life Insurance Help In Tax Saving?

How Does Life Insurance Help In Tax Saving?

Tax Saving

A life insurance policy is usually the first investment made by a person when they begin working and earning for themselves. Everybody wants to ensure their protection as well as protection for their loved ones in case something happens to them, and a life insurance policy is usually the best way of guaranteeing that protection.

A life insurance policy has a range of benefits, the most important being that it ensures your family and dependents can continue their standard of living even if you are no longer around to provide for it. You can choose from a variety of situations, and ensure that your policy remains equipped to deal with it regardless of the situation that may befall you. You can also choose to have the entire sum assured paid out to your dependents as a lump sum amount or in installments as a form of income.

You can opt for the iSelect Star Term Plan, available on Canara HSBC Oriental Bank of Commerce, which allows you to customise your insurance policy according to your requirements at very cost-effective premium rates. Both coverage and terms of premium payments can be customised according to your personal needs.

One major reason that life insurance policies continue to be one of the most sought-after investment instruments are the tax benefits available with them. Life insurance tax benefits cover some of the best tax provisions available under the Income Tax Act, 1961. Read on below to learn more about life insurance tax benefits and the relevant sections pertaining to them.

Section 80C: This section specifically talks about tax provisions available on the premiums paid by the policyholder towards their insurance policies. Section 80C allows for tax exemptions on premiums paid towards life insurance policies. Since total deductions up to Rs. 1.5 lakh are allowed under this Section, this is one of the best life insurance tax benefits available to policyholders. However, for claiming this benefit, you need to ensure that your premium amount is not more than 10% of the total sum assured offered by the policy. For instance, if the sum assured of your policy is Rs. 10 lakh, you need to be paying up to Rs. 1 lakh in order to avail this benefit under Section 80C. For maximum benefits, you should consider investing in the iSelect Star Term Plan, available on Canara HSBC Oriental Bank of Commerce. Not only will you be eligible for tax benefits, but you also receive a range of other benefits including the option to add your spouse at a discounted premium rate to the same policy.

Section 10(10D):Section 10(10D) of the Income Tax Act, 1961 pertains to the benefits received through a life insurance policy. Since there are no maximum limits to this benefit, any amount received under this Section is completely exempt from taxation. Additionally, this benefit could be anything ranging from death benefit to maturity benefit or even the benefit received for surrendering the policy. However, if you choose to surrender your insurance policy, there are a few other things you should keep in mind.

  • The surrender benefit is exempted from taxation only if the policy is surrendered after the completion of 2 years. This is valid on traditional life insurance plans with a single premium.
  • With a regular premium policy, you are eligible for tax exemption on the surrender benefit only if the premiums have been paid for a total of 2 years.
  • If you have opted for a Unit Linked Insurance Plan (ULIP), you can only surrender the policy after the 5-year lock in period has been completed to receive the tax benefits

Section 10(10A): This section of the Income Tax Act, 1961 relates specifically to pension plans, whether as part of a traditional life insurance policy or as a ULIP. Since your pension plan allows you to withdraw a third of the corpus for vesting purposes, this portion becomes tax-free owing to Section 10(10A). Since the rest of the corpus is paid in the form of annuity, these are not tax-free.

Section 80CCC: Section 80CCC also relates to pensioners, and more specifically, to the premiums paid towards the pension or annuity plan. Under this Section, the premiums paid are exempted from taxation up to a maximum limit of Rs. 1.5 lakh, but it also includes the benefits under Section 80C. Thus, if you are paying premiums towards a pension plan, your maximum limit of tax exemption is capped at Rs. 1.5 lakh, combining both Sections.

Life insurance tax benefits are only one of the reasons why these policies are the most sought-after investment instrument. With the iSelect Star Term Plan, available on Canara HSBC Oriental Bank of Commerce Life Insurance, you can avail a range of other benefits including customised plans wherein you can decide your frequency of premium payments as well as the manner in which the sum assured will be paid to your nominees.

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Annual Income (In Lacs)

FAQs Related to Tax Saving

First of all, your gross total income is taken into account and all applicable deductions/exemptions are deducted out of it, the resultant amount is the net income, upon which the Income Tax is calculated, on the basis of income tax slabs that are announced each year in the Union Budget.

How much tax you can save depends on your financial portfolio and profile. The most common avenue for tax-saving is Section 80C, which allows you deductions up to Rs 1.5 lakh in your taxable income. The implication is that you can save up to Rs 46,800*in taxes in a year, depending upon the income tax slab you belong to. Similarly, other avenues like interest on loans, health insurance etc also provide deductions capped at a certain amount.

*Tax saving of Rs.46,800/- is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on life insurance premium of Rs.1.5 lakh, who is having taxable income upto Rs.50 lakhs.

You can choose from many investments that are tax-exempt: not an exhaustive list, but includes Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), life insurance plans, Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), tax-saving bank FDs.

First of all, make investment of Rs 1.5 lakh in investments instruments covered under Sections 80C to reduce your taxable income. Claim deductions for the interests paid on home loan and/or education loan if any. Get a health insurance policy and claim for other medical expenditure like preventive medical healthcare check-up, expenditure on rehabilitation of handicapped dependent relative, among others. Mainly, the idea should be finding out which tax saving avenues fit well with your larger financial goals and invest in them!

The maximum limit of investment that will reap the benefits of deduction from taxable income under Section 80C is Rs 1.5 lakh.

There is no limit to the number of tax-exempt investments one can have in a financial portfolio. However, it is important to note that there is a limit to how useful any instrument can be for the purpose. This is because the amount of deduction that can be claimed for specific instruments is capped at a maximum value. At the same time, keep your financial portfolio balanced so that it also provides safety, returns and liquidity.

First of all, make use of the Rs 1.5 lakh deduction allowed under Section 80C. This can be done by making investments in life insurance premium, Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), among others.

Second, make use of the deductions available in respect of health insurance and other medical expenses. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of Self and your family i.e., Spouse and children. This can include preventive healthcare check-ups too upto Rs 5000/-. Under section 80D you can also claim additional deduction upto Rs. 25000/- (Rs. 50000 in case of senior Citizen) for health insurance of your parents.

Apart from Section 80C, various deductions and exemptions has been provided under the provision of Income Tax Act, 1961 like deduction under section 80D can be claimed for the payment of health insurance, deduction upto Rs 50,000 on home loan interest under Section 80EE. Any donations you make to charitable institutions are also allowed as deduction under Section 80G, subject to condition prescribed therein.

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