In India, life insurance plans serve two major purposes. They act as substantial tax saving investments and offer solid financial protection. In fact, as per the Income Tax Act of 1961, policyholders hold several options for reducing their taxes. These include Section 10(10D) tax exemptions on policy proceeds and Section 80C tax deductions on paid premiums, with the latter offering an annual deduction of up to ₹1.5 lakhs. Apart from this, Sections 80D and 80CCC provide additional provisions that add up to the tax advantages.
Read on as we discuss how to save taxes with life insurance policies and what tax benefits you can achieve as per different sections of the ITA.
How Can You Save Tax With Life Insurance Plans?
Purchasing a life insurance policy at different phases of the plan can result in significant income tax savings. Here’s how you can do it.
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Phase 1 (Benefit of Entry)
At this point, you will be qualified for tax deductions under the Income Tax Act’s sections 80C, 80CCC, and 80D. Herein, Section 80C, Section 80CCC and Section 80D deal with life insurance, pension schemes, and health insurance respectively. With some plans, you can opt for critical illness riders, which qualify you for exemptions under Section 80D.
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Phase 2 (Profit Earnings)
Your investment in the policy will increase over time. Note that the payouts’ taxability is subject to certain criteria.
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Phase 3 (Fund Switching)
Unit linked insurance plans invest a part of your premium in the market. In case you would like to move/switch between several assets, these transfers can be made between debt, equity, or other funds, absolutely tax-free.
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Phase 4 (Benefit of Exit)
The Income Tax Act of 1961’s Section 10(10D) allows for tax exemptions on the policy’s earnings or proceeds. While the death benefit is always tax-free, you must be aware of and abide by a few terms and conditions if your policy offers maturity benefits.
Tax Benefits of Life Insurance Under Various Sections of the 1961 Income Tax Act
There is a reason why life insurance policies are considered worthy tax saving investments. Let’s take a look at the various provisions included in the Income Tax Act of 1961.
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Section 80C
Under this, you, as a policyholder can lower your tax burden by paying premiums for a life insurance plan. You can also claim for a deduction up to ₹1.5 lakh in annual premiums.
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Section 80CCC
After paying insurance premiums to the relevant pension or retirement policies, policyholders are entitled to tax deductions under this clause. A maximum deduction of ₹1.5 lakhs is permissible annually including those under 80C. However, if the policyholder claims a deduction under this provision, the money received upon surrendering the pension plan will be taxed as his income.
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Section 80D
Policyholders can save taxes when they invest in critical illness riders. This also applies to policies that are taken for parents, spouses, or children. The annual tax advantage is limited to ₹25,000. If you are paying the premium for your parents who are older than 60, this amount can go up to ₹1,00,000. Additionally, subject to the aforesaid threshold level, you can claim a tax deduction of ₹5,000 for annual preventative healthcare services including health checkups.
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Section 10(10A)
This clause exempts government workers and pension funds of life insurance firms from paying taxes on a commuted pension, which is paid out as a lump sum. Monthly or non-commuted pensions are not tax-exempt and are subject to full taxation.
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Section 10(10D)
This provision relieves you of paying taxes on the payments or proceeds when the policy matures. As long as the policy meets the requirements outlined, the benefits are often applicable to proceeds from life insurance plans, including maturity or death benefits.
Wrap Up
The tax advantages associated with purchasing life insurance policies make them a smart investment for you and your family. Nevertheless, it is important to remember that you should not get life insurance merely because it is one of the best tax savings investments. Before making a purchase, make sure you are clear about your objectives, finances, personal preferences, income, and so forth. Additionally, one of the best online investment tips would be to compare several plans and read the terms and conditions of each one thoroughly, before purchasing a policy.
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