Although you can avoid taxes a little, unlike every other thing in your life, income tax is certain. Basically, it’s just that you do have a tax liability since your gross annual income falls under a certain tax bracket. However, there are ways you can minimize your annual income tax liability if you purchase health insurance, life insurance, a pension plan, or are paying your home loan installments. Although you’re not advised to consider insurance policies as your tax-saving instruments, you can certainly reduce your annual tax liability by producing insurance premium payment receipts.
How to Save Tax?
Anyone who has some tax liability must invest their money in one or more tax-saving instrument. In fact, tax saving is one of the key aspects of your personal finance, which always interests you, rather all of us to be precise. This could be due to the fact that you see the outcome straight away. To complement this interest, there are multiple categories that facilitate you save tax to a certain extent if not completely. Insurance is one of those areas wherein only a small segment of India’s population prefers to invest in.
We discuss the 3 major sub-categories of insurance – Health Insurance, Life Insurance, and Pension Plans in the below section:
1. Health Insurance – Section 80D
“Health is Wealth,” they say. As a matter of fact, both Health and Wealth are key aspects of your life. In other words, your life can’t be peaceful if you lack any of these two. Today, almost every financial advisor stresses on understanding the importance of health insurance in an individual’s personal financial planning. They rather recommend purchasing an adequate mediclaim policy to meet both your financial and medical needs. Let’s explain how.
Life is uncertain and you never know what medical emergency may ruin your personal finance and literally drill a hole in your bank account. On the other hand, a health or medical insurance policy provides you with assured medical assistance in such emergency scenarios, as you pay a certain amount of money as the insurance premium. Your insurer, in exchange for the premium, provides you the necessary medical assistance at a range of network hospitals spread nationwide. At the same time, you get to save tax, based on your annual premium. Let’s make it clear below:
The premium paid for a health insurance policy qualifies for the tax deduction under section 80D of the Income Tax Act, 1961. In other words, if you pay Rs. 17,000 as your health insurance premium, then you can claim tax deduction based on that amount. The maximum tax deduction you can avail under section 80D of the Income Tax Act is Rs. 25,000 in a year. However, if you’re above 60 years of age and have senior citizen health insurance, then you get an additional tax deduction of Rs. 5,000 annually, which sums up to Rs. 30,000.
Moreover, if you pay the health insurance premium for you and your family (spouse and children), and your dependent parents (either one or both) who are senior citizens, then you can avail a tax deduction of up to Rs. 55,000 annually. An additional deduction of Rs. 5,000 can also be availed subject to the annual health checkups.Online GST Certification Course by TaxGuru & MSME- Click here to Join
Note: You can claim a tax deduction if you pay your annual premium via either a Cheque or Internet Banking.
2. Life Insurance – Section 80C
Life insurance is a blend of various products, viz. term plan, whole life plan, money back plan, and ULIPs (Unit-Linked Insurance Plans). A term plan gives you the benefits of a pure insurance plan, whereas the others combine the benefits of investment and insurance plans. However, the Income Tax Department of India treats all of these plans equally from the tax perspective. If you choose to invest in any of these life insurance policies, the premium you have to pay makes you eligible for tax deduction. Let’s make it clear below:
Your life insurance premium is tax-exempted under section 80C of the Income Tax Act, 1961. The maximum tax deduction under this IT section is Rs. 1.5 Lakh annually. If you’re a working individual and your employer deducts a certain amount as PF (Provident Fund) from your salary, then the total annual PF deduction also comes under section 80C.
As per life insurance terms and conditions, the sum assured is payable to the nominee after the death of the policyholder during the policy tenure. The amount payable is wholly tax exempted under section 10(D).
3. Pension Plans – Section 80CCC
Although Pension Plans come under the broad category of life insurance, they are completely different from life insurance plans in the way the investment is made. Pension or annuity plans have two different phases, i.e. Accumulation and Withdrawal. However, the tax benefit is applicable only to the phase of Accumulation – the period during which you pay the premiums.
Let’s explain below how you can save tax if you choose to purchase a pension plan:
The maximum tax deduction allowed under section 80CCC of the Income Tax Act, 1961 is Rs. 1.5 Lakh, as this scheme works in conjunction with section 80C. However, if you claim a tax deduction based on the premiums paid for a pension plan, you cannot claim tax deduction under any other income tax section for the same.
All non-resident individuals are also allowed to invest in pension plans and claim tax deduction under section 80CCC.
Note: The interest earned from a pension plan is taxable, so the policyholder will have to pay a certain amount as the tax applicable as per the respective tax slab.
Wrapping it up!
Taxes are certain; so is the income tax. Unlike every other type of tax, you certainly can reduce your income tax liability if you purchase a life or health insurance policy as per your requirement. Although insurance should be the last option when you need to save tax, you still have this option so popular that it brings the dual-benefit of protection and investment.
P.S. Never purchase any insurance policy in a hurry. Take your time and choose the most suitable plan for you.