6. The taxes and finances of Insurance

icon

“There is nothing certain in this world except the death and the Tax, yet the Death and Tax are uncertain as nobody knows when will he die or when the tax will change”

-Benjamin Franklin

Insurance is one of the topmost requirements in today’s times. It provides assistance in times of crisis, puts a stop to the strain on the pocket, and reduces the worries with instant protection for the individual and the family. Apart from bringing a sense of security and peace to your mind, insurance has other benefits for managing finances and implies multiple tax benefits. 

We love it when we shop for something brand new, along with additional free benefits. That’s exactly what insurance does for us! Life insurance gets you a free tax voucher. Meaning: It helps you achieve your goals in life as well as save taxes.

Taxes can be difficult to understand. Even Albert Einstein is reported to have said that income tax was the most challenging concept to understand. That being said, the concept of saving taxes using insurance is comparatively more straightforward. It works like this:

You buy a life insurance policy by paying a premium. This premium amount is deducted from your income while calculating tax. You can deduct as much as Rs. 1.5 lakh by buying life insurance. Thus, your income reduces by Rs. 1.5 lakh in the eyes of the taxman.

Next, calculate tax as a percentage of your income. With a lower income, your tax reduces too. By buying life insurance of up to Rs. 1.5 lakh, you can save as much as Rs. 45,000 (30% of Rs. 1.5 lakh). But that’s not all. Insurance has many tax-saving features. Let’s have a look:

Saving taxes using deductions under the most common section—80C

Want to save tax? Head to Section 80C of the Income Tax Act. This is where all the tax-saving investment options are listed.

Do you have a home loan? The interest that you pay can utilize a significant portion of your exemption limit of Rs. 1.5 lakh. If you have children, you could claim deductions using their tuition fees; however, if you need to reach Rs. 1.5-lakh target, you also have a multi-purpose option—life insurance. You can even have a mix of insurance policies to meet the Rs 1.5-lakh target.

Just make sure that the premium amount is not more than 10% of the insurance cover. For example, let’s say you get a life insurance cover of Rs 10 lakh, your premium should not exceed 10%, i.e., Rs 1 lakh. Otherwise, it would not be eligible for tax-saving.

Even your investments through insurance get you tax benefits.

Unit-linked insurance plan, or ULIP, attempts to bring you the best of both worlds—insurance and market-linked investments.

You pay a single premium. Part of it is used as your term insurance premium. The other amount is invested in equity or the debt market.

But from the taxman’s point of view, it’s a single premium. So, the whole amount can be used to claim tax deductions under section 80C.

Ensure proper health care while saving taxes using section 80D

The government wants you to insure your life AND health. Both are equally essential to you. After all, even a simple health issue can drain your money completely. Only adequate health insurance can halt this drain.

And this is why the government offers tax benefits on medical insurance too.

Ajay is 50 years old and his father is 71 years old. Rahul has taken a health insurance policy for himself and his father for which he pays insurance of Rs.28,000 and Rs.37,000, respectively. What can be the maximum amount he can claim under Section 80D?

As Rahul is not a senior citizen himself, he can claim up to Rs 28,000 for the premium paid on his policy. For his father’s health insurance policy, Rahul can claim up to Rs.50,000 as he is a senior citizen. In the given case, the tax benefits he can avail of are Rs 28,000 and Rs 37,000. Therefore, the total tax deduction will come to Rs.60 000.

What happens in the case of HUF?

A HUF can also claim a deduction under section 80D for a health insurance policy taken for any of the HUF members. This deduction will be Rs.25,000 if the insured member is below 60 years, and the deduction will be Rs.30,000 (increased to Rs.50,000 in Budget 2018) if the insured member is 60 years old or above.

Non-earning family members and your entire family as an entity can help you save taxes.

Not everybody buys insurance on their own. You can purchase insurance for your dependent parents, a non-working spouse or even your child. And when you do so, you can claim tax deductions on their behalf too.

So, for example, you pay the premium for your family as below:

– Life insurance

  • For self: Rs 45,000
  • For spouse: Rs 40,000
  • For child: Rs 15,000
  • For elderly parents: Rs 50,000

– Health insurance

  • For a family of three: Rs 25,000
  • For dependent parents: Rs 40,000

You could thus claim a total deduction of Rs 1.5 lakh for life insurance under Section 80C and Rs 55,000 (25,000 + 30,000) for health insurance under Section 80D.

Did you know? The return from your insurance is also tax-free

While many of us know the answer to the question, this is still one of the most commonly asked questions. “Are there any taxes on the payments you receive from the insurance?”

Let’s reassure you: No. The money you receive from insurers, be it the sum assured or a bonus, is tax-free. This is irrespective of when the money is paid—on maturity, surrender or policy or during a death claim.

The only payout that could attract tax is the money you earn from any market-linked investments through ULIPs.

However, equity-based investments attract zero tax if you sell it after one year. Only the debt-based assets can attract a Capital Gains tax depending on how long you held it.

This was all about how you can save tax and manage your finances with insurance. But do you know what different types of Insurance are available today? To know this go to our next chapter!

Wrapping up

Now that you know The laws and regulations of Insurance, it’s only logical that we move on to the next big question -The taxes and finances of Insurance  To discover the answer, head to the next chapter. 

A quick recap

  1. From nationalisation to privatisation, Insurance in India has contributed majorly to the finance and GDP growth of the nation.
  2. Insurance Association of India: guides the insurers towards the right practices by setting up a general code of conduct for the business.
  3. Tariff Advisory Committee: As the name suggests, this controlling body keeps an eye on the rates of interests, benefits offered, duration and covers, terms and conditions provided by the insurance providers to the policyholders.
  4. Ombudsmen is the segment body that is responsible for dealing with the grievances of the consumers, settling the insurance claims and checking for fair means of code of conduct amongst the insurance providers.
  5. The Insurance Act, 1938, is a broad legal binding that shares the basic structure and functioning of the industry. 
  6. The IRDAI Act establishes itself as an Act to provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry
icon

Test Your Knowledge

Take the quiz for this chapter & mark it complete.

Comments (0)

Add Comment

Get Information Mindfulness!

Catch-up With Market

News in 60 Seconds.


The perfect starter to begin and stay tuned with your learning journey
anytime and anywhere.

Visit Website
logo logo

Get Information Mindfulness!

Catch-up With Market

News in 60 Seconds.

logo

The perfect starter to begin and stay tuned with your learning journey anytime and anywhere.

logo

Ready To Trade? Start with

logo
logo