You will probably know that life insurance policies are significantly useful tax planning tools. It’s primarily because the policyholder is eligible for tax benefits under the Income Tax Act of 1961. Even though there are several ways of saving tax, life insurance is regarded as the most effective tax planning instrument.
Today, this article will discuss life insurance tax benefits in major detail. But, before we begin, let us give you a quick overview of the various aspects of life insurance.
Come, let’s get started.
Life Insurance – What is it?
Life insurance is a typical contract between a policy owner and a life insurance company. In fact, a life insurance policy guarantees that the insurer must pay a sum to the beneficiary when the insured person dies. This is basically done in exchange for the premiums paid during the policyholder’s lifetime.
Saving Income Tax with Life Insurance Plans
Whenever you opt for life insurance plans, you can save on taxes under the Income Tax Act of 1961. However, you should also note that you can also get tax benefits at various stages of the policy.
Here, we have elaborated on the benefits that can be acquired at different stages:
Entry Advantage: In the initial stage, you will get tax benefits on your premium under Section 80C (Life Insurance), 80CCC (Pension), and Section 80D (Health).
Earning Benefit: At this stage, your investment in an insurance policy acquires the potential to grow. Thus, it automatically becomes non-taxable, and you can remarkably save on your taxes.
Exclusive Switching Advantage: Here at this stage, you stand an opportunity to switch between debt, equity, and balanced funds. And irrespective of the time you consider these switches, your investment still remains non-taxable.
Exit Benefit: Finally, at the last stage, you will receive a tax-free maturity benefit subject to Section 10(10D) conditions.
What are the Tax Benefits Offered Under the Income Tax Act 1961?
The Income Tax Act of 1961 offers a plethora of tax benefits. Some of the most important ones include the following:
Section 80C: You can claim a deduction from your taxable income because of the premium paid towards life insurance. And this is applicable to the insurance policies you acquire for yourself, your spouse, or your children. In fact, you will also acquire a maximum deduction of up to Rs. 1.5 lakhs.
Section 10(10D): In Section 10(10D), the conditions state that the returns earned from the life insurance policies are tax-free.
Section 10(10A): Under this section, 1/3rd of your payment received under your pension plan during your retirement is tax-free. Please note that this exemption is popularly known as commutation.
Section 80CCC: Here you can get tax benefits on the premium paid up to Rs. 1,50,000 towards the retirement policies or pension. But if you ever consider surrendering the plan, your pension will be taxed according to the existing tax laws.
Section 80D: Under this section, you can acquire remarkable tax benefits on the premium amounts paid. However, the payments must be made in any mode except cash. You can get a tax benefit on the premium amount paid up to Rs. 25,000. But if you are 60 years or more, the limit automatically shoots up to Rs. 50,000.
Section 80CCE: There is an overall deduction limit from the taxable income to get maximum tax benefits. However, the limit is stated at not more than Rs. 1,50,000.
Life insurance works by providing death benefits in exchange for the paid premium amounts. Term life insurance, the most popular life insurance, lasts for not more than 10 to 20 years.
However, permanent life insurance also provides remarkable death benefits but typically lasts a lifetime. This means as long as the premiums are paid, the life insurance will remain applicable. Also, note that you can also get a tax refund from your investment instrument if you ever pay excess tax.