Tax Benefits on Child Insurance Plans

What are Child Insurance Plans?

Child insurance plans are policies that cover the future needs of your child’s career, marriage, education, etc. They offer the dual benefits of investment and insurance. Similar to a ULIP, most child plans offer a three-way benefit. The different benefits of a child insurance policy are death, maturity, taxation, and rider/add-on benefits.

Child plans will secure your child’s finance in your absence. The plan takes care of itself to enable your child’s future needs. The idea depends on the corpus building as part of an investment. A child’s investment plan is the best financial gift you can give your child.

What are the Tax Benefits on Child Insurance Plans?

The primary tax benefits that get covered in child insurance plans are as follows:

1. Tax Benefit on Premiums

   This benefit comes under Section 80C of the Income Tax Act of 1961. Here you can avail of tax benefits up to a sum of Rs. 1, 50,000 annually. The tax exemption is on the annual premium payments you make on your policy. 

   If you are in the highest bracket of 30%, you can save a maximum of Rs. 45,000 per year in tax. The deduction directly applies to your income tax amount on the premiums paid towards the child plan. It is an added advantage that helps you focus on the current financial priorities.

2. Tax Benefit on Income from the Plan

   If you make an income from your child insurance policy, you can avail of tax deductions. The benefits apply to you under Section 10 (10D) of the Income Tax Act.

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3. Tax Benefit on Maturity

   The tax benefits on the maturity amount also come under Section 10 (10D). They apply to the maturity benefits that your policy collects during the term. You could receive the maturity benefit after the policy term expiry. Your child or nominee will receive it in the unfortunate eventuality of your death. 

   The maturity proceeds from these plans are tax-free. You can think of it as a pure saving product as there is no tax on the full maturity amount.

4. Tax Benefit from Treatment

   If your child has special needs, you can claim a tax deduction from the annual income. You can claim up to 33% of the tax benefits for money spent on the child’s treatment. You can find this deduction scheme under Section 80DDB.

   Child disability is also another section that attracts tax benefits. You can claim up to 40% of the tax deduction for a minor disability. For a major disability, the claim on the tax deduction increases to 80%. Section 80DD of the Income Tax Act covers this benefit.

5. Tax Benefit on Loans for Higher Education

   If you take higher education loans for your child against the insurance policy, tax deductions are available. As per Section 80E of the Income Tax Act, the interest you pay on a loan attracts tax benefits. The loan purpose should be only for your child's higher education requirements.

6. Tax Benefit on Fund Formation

   This scheme is a concept where you can form a new, separate fund for your child. You can set up this fund in correspondence with the existing investment plan. However, you should not claim any amount from the fund before the child’s higher education goals are in motion. You can actively receive partial tax deductions from this fund.

7. Tax Benefit on Tuition Fees

   It is an exclusive tax benefit that helps you receive a deduction on tax under Section 80C. You can claim tax deductions of up to Rs. 1, 00,000 annually on your child’s tuition fees. This tax exemption works only for two children or fewer. 

   The tuition fees should come under a specific bracket as per regulations. You cannot avail of this tax benefit for higher sums of tuition fees.

   *Tax benefit is subject to changes in tax laws. Standard T&C apply.

How to Avail of the Tax Benefits Under Child Insurance Plans?

There are no specific steps you need to follow for receiving tax benefits on a child insurance plan. All the tax benefits that are a part of any policy are available under the terms & conditions of the plan. 

For example, you will receive the tax benefits on maturity benefits when a policy’s maturity term comes of age. 

All other tax benefits follow the same procedure. Your job is to get clarification regarding the tax benefits within the policy you purchase. You can do the research yourself or contact a financial advisor. When you complete the policy purchase, possess a general idea of how the taxation benefits will add to your plan over time.

You can prepare your child with the information as well. Enable them to have an excellent overview of how the benefits work. The tax benefits work according to the Income Tax Act and the Government regulation formalities.

*Tax benefit is subject to changes in tax laws. Standard T&C apply.

In Conclusion

You should not invest in a child insurance plan depending on the taxation benefits alone. Ensure the credibility of the plan for supporting your child’s future goals and aspirations. The tax benefit is a bonus that you can think about in detail during the policy purchase. The primary concern should always be how the investment helps to meet the financial needs of your child.