Life insurance policies are known to provide financial security against the risk of premature death. They, therefore, help individuals plan their finances so that any eventuality does not derail their financial planning. Besides providing financial security, certain life insurance plans help in wealth creation too. Then there is the tax benefit of life insurance policies, both at the time of investment as well as on the benefits received. In fact, in this tax planning quarter of January, February and March (JFM), life insurance policies can not only help your clients plan their finances but save tax too. Here’s how –
- Tax benefit on life insurance premiums
Premiums paid towards life insurance policies qualify as a deduction under Section 80C of the Income Tax Act, 1961. You and your clients can claim a deduction of up to INR 1.5 lakhs by investing in life insurance policies. Thus, the money that your clients invest in term plans, endowment plans or even ULIPs, gets deducted from their taxable incomes and lower their tax liabilities.
Moreover, life insurance pension plans also allow tax benefits on premiums. The premiums paid towards such plans are allowed as a deduction under Section 80CCC. The limit of deduction is INR 1.5 lakhs which also includes the afore-mentioned 80C deduction.
So, if your clients are in the 30% tax bracket, they can invest premiums up to INR 1.5 lakhs and save up to INR 45, 000 in taxes.
- Tax benefit on life insurance proceeds
Death benefits received from a life insurance policy is always tax-free. In case of maturity proceeds too, if the premium paid is up to 10% of the sum assured (20% if the policy was bought before 1st April 2012), the entire amount is allowed as a tax-free income. Even the bonus, loyalty additions or guaranteed additions paid by endowment and money back plans on maturity enjoy tax benefits and give your clients tax-free incomes. This tax benefit is allowed under Section 10(10D)
However, in the latest Union Budget for the financial year 2021-22, the tax benefit on maturity proceeds from a unit linked plan have been changed. For policies issued on or after 1st February 2021, if the aggregate premium under ULIPs is more than Rs.2.5 lakhs, the maturity benefits would be subject to long term capital gains tax just like equity mutual funds. So, if the capital gains are in excess of INR 1 lakh, the excess gains would be taxed @10%.
- Tax benefit on commuted pension
If your clients have invested in deferred annuity plans, on maturity, they can withdraw up to 60% of their corpus in lump sum. This withdrawal, called commutation, is tax-free up to a certain extent. Your clients can avail tax-free commutation income on up to 1/3rd of the accumulated corpus. This tax benefit is provided under Section 10(10A).
A special mention – ULIPs
ULIPs, like other life insurance plans, enjoy the tax benefits on premium paid and maturity benefits earned (provided the premium is up to INR 2.5 lakhs). Moreover, they also provide your clients no-tax switching which makes them a complete tax-saving package deal. In case of changing market dynamics, your clients can freely switch between equity and debt funds in their unit linked plan. No tax would be levied on such switching and your clients would be able to change their portfolio according to the changing markets.
Furthermore, ULIPs allow your clients to withdraw from their fund values during the policy tenure through partial withdrawals. Such withdrawals are also tax-free and your clients can enjoy tax-free incomes.
However, the change in the latest Budget 2021 should be kept in mind when selling ULIPs to your clients. If their premium is more than INR 2.5 lakhs, they would not be allowed to avail tax benefits on the maturity proceeds.
Whether your clients need
- A term plan to provide financial security to their families
- Guaranteed incomes through endowment or money back plans,
- Or investment returns through ULIPs
Life insurance can help them fulfil their needs and also save tax in the process. So, educate your clients about the tax-saving nature of life insurance policies and help them plan their taxes effectively. As they become aware of the tax benefit, your insurance business would grow on increased demand for life insurance policies. You can also include life insurance in your portfolio and plan your own taxes. So, use life insurance’s tax benefits for your clients’ needs, for driving your business numbers and also to save taxes yourself.