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The importance of both securing your family's future and saving on taxes cannot be overstated. Tax saving life insurance plans offer a dual benefit: they provide a safety net for your loved ones while helping you reduce your tax liability.
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Among the different types of tax saving insurance schemes, life insurance is the most popular option for tax savings. Let us take a look at what tax saving insurance plans are, their types, their benefits, and how they can be a strategic part of your financial planning.
Term Plans
Tax saving life insurance plans are financial products that offer life coverage and help policyholders save on taxes. These types of life insurance plans are structured in such a way that the premiums paid towards the policy can be claimed as deductions under various sections of the Income Tax Act. Their main aim is to provide financial security to the policyholder’s family in case of an unfortunate event while also offering tax-saving benefits.
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Life Insurance Plans: These plans provide financial protection to the policyholder’s family in the event of their untimely demise. The sum assured is paid to the beneficiaries, ensuring their financial stability. In addition to providing life cover, life insurance plans often come with a maturity benefit, making them a popular choice for wealth creation and life insurance tax benefits.
Term Insurance Plans: Term insurance is a pure protection plan that offers a high sum assured at low premium costs. The policyholder pays a premium for a specified period, and in the event of their death during this term, the beneficiaries receive the sum assured. Term insurance is simple and focuses solely on providing financial protection to the policyholder's dependents.
Unit-Linked Insurance Plans (ULIPs): ULIPs offer a combination of insurance and investment. A portion of the premium goes towards life coverage, while the remaining is invested in equity or debt funds, depending on the policyholder's preference. ULIPs offer tax-saving benefits and the potential for wealth creation, though they come with higher risks due to market fluctuations.
Health Insurance Plans: Health insurance primarily provides coverage for medical expenses incurred during illnesses or accidents. While the main focus is not on life cover, health insurance premiums also qualify for tax deductions, making them a component of tax saving strategies.
Pension Plans: Also known as retirement plans, these are designed to provide a regular income after retirement. While pension plans focus on post-retirement financial security, the premiums paid can also qualify for tax deductions.
FD (Fixed Deposits): An FD or a Fixed Deposit is a tax saving instrument that can help you save on your yearly taxes under section 80C and build a corpus on the amount invested. These usually have a lock-in period but allow liquidity in case of an emergency.
PPF (Public Provident Funds): Public provident funds or PPFs are a long term savings cum investment product that allows you to open a PPF account at the post office or at private sector banks and earn a guaranteed rate of interest. These offer a tax deduction under section 80C of the IT Act, 1961.
NPS (National Pension Scheme): The NPS is a cost-effective scheme since the fund management charges are low. The amount is invested into 3 different asset profiles: Equity, Corporate Bonds, and Government Securities. You can either choose to manage your portfolio yourself or auto-choice.
Senior Citizens Savings Schemes: This government saving scheme is for individuals over the age of 60 years and provides a steady and secure source of income in the post-retirement life. These schemes offer large returns and are eligible for tax deductions under section 80C.
National Savings Certificates: This is a savings bond scheme that encourages small to mid-cap investors to invest while saving on section 80C. These can bought by an investor for themself, for a minor, or even with another adult as a joint account.
Here is a list of tax benefits you can avail of by buying life insurance in India:
Section 80C Deductions: Under Section 80C of the Income Tax Act, premiums paid for life insurance policies qualify for deductions up to INR 1.5 lakh per year. This means the amount you pay towards your insurance premiums can be deducted from your taxable income, reducing your tax liability.
Section 80D Deduction: While primarily related to health insurance, some term plans also offer tax benefits under Section 80D. Under this, the premiums paid for health riders (like critical illness cover) attached to life insurance policies can be claimed under Section 80D, providing additional tax benefits up to INR 25,000 per annum (or INR 50,000 for senior citizens).
Section 10(10D) Exemption: The maturity proceeds or death benefits received from a life insurance policy are exempt from tax under Section 10(10D), provided the premium paid does not exceed 10% of the sum assured in any year. This ensures that the sum received by your family is not subject to taxation, providing them with the full benefit of the insurance policy.
High Coverage at Low Premiums: Term insurance, in particular, offers a large life cover at affordable premiums, making it an efficient way to ensure financial protection for your family without straining your budget. This is one of the most popular choices amongst people looking to get term insurance tax benefits at affordable premiums.
Guaranteed Payouts: In the unfortunate event of the policyholder’s death, the sum assured is paid to the beneficiaries, ensuring their financial stability. This guaranteed payout, combined with tax benefits, makes life insurance and term insurance an attractive option for many.
Flexible Options: Insurance companies offer a wide range of policies, allowing you to choose coverage that fits your financial goals and life stage. Whether you prefer a plan with maturity benefits or a pure protection plan, there is a policy tailored to meet your needs.
Here is how you can choose the
Assess Your Needs: Evaluate your financial goals, family needs, and life stage to determine the type and amount of coverage required.
Compare Plans: Use online tools like calculators to compare different types of life insurance plans, premiums, and benefits to find the most suitable option.
Check Claim Settlement Ratios: Choose insurers with a high claim settlement ratio to ensure a smooth and hassle-free claims process.
Read the Fine Print: Understand the terms and conditions, exclusions, and limitations of the policy before purchasing.
Consider Riders: Opt for additional term insurance riders like critical illness, accidental death, or disability coverage to enhance your policy’s protection.
Tax saving insurance plans are an integral part of comprehensive financial planning, offering the dual benefits of life protection and tax savings. Life insurance and term insurance plans are particularly effective for securing your family's future while providing significant tax benefits. By choosing the right insurance policy, you can ensure peace of mind, knowing that your loved ones are protected and you are optimizing your tax liability.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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