When it comes to buying insurance, many individuals associate insurance plans to protect them from the financial risks that they face. While this is the fundamental use of an insurance policy, the tax aspect of insurance should also be understood. Life and health insurance policies help in saving taxes while at the same time allowing coverage against unforeseen emergencies. Do your clients know about the tax advantages of buying life and health insurance plans?
Many individuals have an idea that a life and a health insurance plan help them lower their tax liability and your clients might too. However, they might not be fully aware of the tax saving potential of such insurance plans. So, let’s explore how a life and a health insurance policy can prove to be tax efficient tools for your clients –
Tax benefits under life insurance plans
Life insurance plans are said to be EEE in terms of taxation. EEE means exempt, exempt, exempt. The three tax exemptions are as follows –
- The investment that your clients do in a life insurance policy would be exempted from taxation.
- The returns which a life insurance policy gives would also be tax free
- The life insurance policy benefit which your customers receive would also be completely tax-free in their hands
Thus, any amount paid towards a life insurance policy as well as any amount received is completely free from tax. The tax exemptions are available under the following Sections of the Income Tax Act, 1961 –
- Section 80C
This Section of the Income Tax Act, 1961 is applicable for life insurance premiums. The premiums paid towards a life insurance policy are allowed as a deduction under this Section up to a maximum of INR 1.5 lakhs. However, to claim the deduction, the premiums should not be more than 10% of the sum assured. If the premiums exceed 10% of the sum assured, deduction would be allowed only on the premium which equals 10% of the sum assured. For instance, if your client buys a policy for a sum assured of INR 5 lakhs, the premium should be within INR 50,000 to be eligible for a deduction. If he/she pays a premium of INR 60,000, deduction would be available only up to INR 50,000 while INR 10,000 would form a part of your client’s taxable income.
- Section 80CCC
This Section is relevant for premiums paid towards pension plans. This Section is a part of Section 80C and allows premiums paid up to INR 1.5 lakhs (including deductions under Section 80C) as deduction from the taxable income.
- Section 10 (10A)
This Section is relevant for deferred annuity plans. On maturity of such plans, 1/3rd of the accumulated corpus is allowed to be withdrawn in cash which is called commutation of pension. If your client opts for commutation of pension and withdraws 1/3rd of the policy benefit in cash, the withdrawn amount would be allowed as a tax-free income under this Section.
- Section 10 (10D)
This Section is applicable for any type of maturity benefit, death benefit, money back benefit or surrender benefit received or any partial withdrawals done from the plan. Any benefit that your clients get from their life insurance policies would be completely exempted from tax under this Section.
Tax benefits under health insurance plans
Under health insurance plans, tax benefit is available on the premium that your clients pay for the policy. The premiums paid are allowed as a deduction under Section 80D of the Income Tax Act, 1961. The limit of deduction is as follows –
- If the premium is paid for insuring the client, his/her spouse and dependent children, deduction up to INR 25,000 is allowed
- If the client is a senior citizen and pays premium for a policy for himself/herself, spouse and dependent children, the deduction limit increases to INR 50,000
- If the client pays premiums for his/her own family as well as for dependent parents, INR 25,000 can be claimed for premiums paid for the family and another INR 25,000 can be claimed for premiums paid for dependent parents
- If the dependent parents are senior citizens, the limit increases to INR 50,000
Thus, if your client is not a senior citizen but his/her dependent parents are, the maximum deduction available is up to INR 75,000 (INR 25,000 for self and family and INR 50,000 for parents). If both the client and dependent parents are senior citizens, deduction of up to INR 1 lakh (INR 50,000 each for self and parents) can be claimed on the premiums paid for a health insurance plan.
ULIPs and added tax advantage
While the premiums paid and benefits received from a unit linked plan qualify for tax exemption under Sections 80C and 10 (10D) respectively, there is another tax benefit under ULIPs. If your clients switch between their investment funds, the switched amount is also tax-free and does not attract taxation.
Who can claim tax exemptions?
Individuals and Hindu Undivided Families (HUFs) can claim the above-mentioned tax benefits from life and health insurance policies.
Insurance vis-à-vis other financial products
The tax benefits provided by insurance plans give them an advantage over other financial products which do not provide the same tax exemptions. For instance, investment in five year fixed deposits and ELSS schemes of mutual funds are allowed as tax-free deductions under Section 80C. However, the returns earned are taxable. Under fixed deposits, interest earnings are taxable unless your client is a senior citizen in which case exemption on interest is allowed for up to INR 50,000. Similarly, returns from ELSS schemes exceeding INR 1 lakh would be taxed at 10%. So, while these investment schemes are popular, they are not tax efficient.
So, educate your clients about the tax efficiency of both life and health insurance plans while at the same time stressing on their importance. Your clients should know how their life and health insurance policies can help them plan their taxes and you can lend a helping hand in reducing their tax liability.
