Written by Tarun Mathur
Every year during the months of December – March, the taxpaying population of India is on the lookout for identifying the best ways that can help them save taxes. As per the Income Tax Act, 1961, any Indian citizen aged below 60 years is liable to pay tax if their annual income exceeds Rs 2.5 lakh.
There are several tax savings options available in the market that can significantly reduce your tax liability legitimately. However, instead of randomly selecting any tax-saving instrument that you may feel will help you save significant tax, it is important to choose options that are the right fit for your age and promise you long term benefits.
One such option is Insurance. Apart from providing comprehensive financial protection when needed, it also helps you to save tax each year. By investing in different insurance products, you save tax under Section 80C and Section 80D of the Income Tax Act.
Let’s take a look at some of the popular tax saving insurance products that can help you to save a chunk of your tax payments legally and provide financial protection to you and your dependents against any unfortunate event.
Section 80C of the Income Tax Act 1961, reduces your tax liabilities by allowing deductions from your total taxable income in a financial year. Currently, the maximum deduction allowed in a financial year under Section 80C is Rs 1,50,000.
One of the most sought after insurance product that helps you avail tax benefit under Section 80C is Term Life Insurance – a pure protection plan. A term life insurance policy pays out the entire sum assured to dependents on the untimely death of the policyholder. Premiums paid towards insuring self, spouse and dependent children are eligible for a tax rebate.
If a life insurance policy has been issued on or before March 31, 2012, the annual premium of up to 20 per cent of the assured sum is exempted. For policies issued on or after April 1, 2012, premiums up to 10 per cent of the sum assured are tax-deductible.
An exceptional benefit of investing in a term life insurance policy is that the payout (sum assured) received by the dependents on the death of the life insured is completely exempted from the income tax deduction.
Apart from term life insurance, you may also choose to invest in new-age Unit Linked Insurance Plans or fourth-generation ULIPs. Quite popular amongst people for minimum charges, better transparency and tax-free maturity benefit, ULIPs can be bought for a term of 15, 20, 25 or 30 years depending upon your financial goal. ULIPs are the best pick for people with a low-risk appetite looking for safe investment options.
Under Section 80D of the Income Tax Act, the maximum amount up to which you can make claim deductions is Rs 1 lakh. This section of the Income Tax Act is dedicated to contributions made towards buying medical insurance for self, spouse, children and parents.
You are allowed to claim a maximum deduction of up to Rs 25,000 in a given financial year for buying health insurance for yourself, your spouse and your children. However, if you are a senior citizen, you can claim a maximum deduction of up to Rs 50,000 on a health insurance policy.
If you buy health insurance for your parents as well, you can avail an additional tax benefit of Rs 25,000 if your parents are not senior citizens and an additional tax benefit of Rs 50,000 if the parents are senior citizens.
In India, an individual qualifies as a senior citizen on completing 60 years of age. Overall, if you purchase a health insurance plan for your family as well as your parents (and both, you and your parents are below the age of 60), you can claim a maximum tax deduction of Rs 50,000. If both you and your parents are above the age of 60 years, you can avail of a maximum deduction of Rs 1 lakh.
Maximum savings with Insurance
By investing in tax-saving instruments under both Section 80C and Section 80D of the Income Tax Act, you can avail the maximum tax rebate on your total taxable income. For instance, if your annual income is Rs 10 LPA, by taking maximum advantage of both the sections, the taxable income can be reduced to 7.5 LPA.
Before choosing any tax-saving instrument, it is important to factor in the returns it promises as there is no point in opting for a tax-saver product that doesn’t suit your and your family’s needs. It is important to stay updated about the latest developments in tax-saving provisions and the different products that can significantly reduce your tax burden.
The author is the CBO at Policybazaar.com. Views expressed are that of the author.
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