How to divide your investment in insurance products to save tax

We have made headway into the new year, which also happens to be the time for financial goal setting and planning for most people. A well-planned beginning helps set the tone for the rest of your year, so it’s imperative to analyse your investment options. Your investments should focus on wealth creation while also ensuring maximum savings and financial security. Tax benefits constitute an important part of your savings and usually rank at the top of an investor’s to-do list. Insurance-cum-investment products can help you achieve all these goals efficiently.

It’s always better to get a head-start as early as possible on your financial planning with tax benefits. It’s often said that you shouldn’t put all your eggs in one basket. This holds true for your investments and it’s always advisable to divide your money into different options for better financial security.

Here, we explore some of these options and their respective features to help with your planning.

Insurance Products under Section 80C and 10 (10) D – Term Insurance, ULIP, Guaranteed Return Plans 

You have three insurance-cum-investment options for tax rebate under Section 80C — Term Life Insurance, Unit Linked Insurance Plans and Guaranteed Return Plans.

Term insurance is pretty much self-explanatory. It not only helps you create a legacy with your investment but also helps with tax benefits under Section 80C and 10(10)D of the Income Tax Act, 1961. The upper limit for exemption here is Rs 1.5 lakh. So, you can save more by purchasing a policy for parents, spouse or kids. As the third COVID wave intensifies, it’s good to have this plan as it will also help safeguard the future of your dependents. 

Next comes ULIP – one of the best investment options to earn tax-free returns. You can get up to 12-15% return with these plans and they also offer tax benefits under Section 80C and 10(10) D of the Income Tax Act, 1961. The policy term for these plans is generally between 5 and 30 years. The best part is you can exit the plan after 5 years or after maturity, and you will still have a tax-free fund value in hand. Further, if you want, you can switch between debt and equity funds based on your preference.

However, the most important feature that an investor should consider is that investing in ULIPs is tax-free for an annual premium of up to Rs 2.5 lakh as per Section 10(10)D. So, it makes sense to invest at least Rs 2.5 lakh as compared to mutual funds where they will be incurring a tax of 10% above Rs 1 lakh. Suppose a 30-year-old invests Rs 10,000 over 20 years in these plans, they can accumulate a tax-free corpus of around Rs 1 crore which will be taxable in the case of mutual funds. The insurance component, once again, makes this option a wise investment choice in the current circumstances. 

Next on the list are guaranteed return plans – the best bet for risk-averse investors. They don’t just promise financial security but also help greatly with tax-saving benefits while letting the policyholder lock their money for longer periods of time. Apart from this, you can choose an income plan to get a recurring income or go for a lump sum benefit plan. For instance, HDFC’s Sanchay Fixed Maturity Plan offers guaranteed returns in the form of a lump-sum benefit at around 5.5% rate of return. This also comes with a life cover and other insurance benefits.

Not to forget, they are your answer to the falling interest rates of FD. While FD stands to reap a taxable ~5% return, guaranteed return plans can get you up to ~6% depending on terms and conditions. Since these plans come with an in-built feature of life cover that is 10 times the annual premium, it automatically qualifies for tax rebate under Section 10(10)D.

Under Section 80D – Health Insurance

The importance of health insurance cannot be emphasized enough, especially as the pandemic gains momentum again. Health insurance offers tax exemption to the policyholder under Section 80D of the Income Tax Act, 1961. Under this section, you are allowed to claim a tax deduction of up to Rs 25,000 per financial year for you, your spouse and dependent children. The medical insurance premium paid for parents qualifies for an additional deduction of Rs 25,000 if they are not senior citizens. In case either or both of your parents are senior citizens, this limit increases to Rs 50,000. Effectively, one can get up to 75,000 in tax deductions on purchasing a health insurance policy for self and parents.

Now that you have your options laid out, you can make a better informed financial decision on dividing your money for reaping higher tax benefits.

(By Tarun Mathur, CBO-GI, Policybazaar.com)