Tired of being pestered at home and in office for lack of tax planning? Consider this easy, inexpensive yet ‘magical’ financial instrument to stop being seen as the irresponsible youngster. This instrument not only saves you tax, but it does so without eating much into your entertainment budget. Add to that, there is no tax payable when the final proceeds of this instrument are paid out! What’s more, if you pay a certain amount towards it every month, it guarantees your family a payback of several times the ‘EMI’ amount – almost from the word go. Imagine paying Rs 10,000 per year, but having the comfort of Rs 30 – Rs 50 lakh if something were to happen to you. All of it, tax-free. Also, if you choose the right kind of product within this investment option, it can grow your monthly savings into a comfortable retirement sum. Interested?
It is quite likely you are! While there are lots of options for the purpose of tax saving, this one has its own set of standout characteristics which no other instrument offers. The product we are talking about is insurance – yes, insurance – the product we all know about but don’t understand – especially the unique benefits it offers. Benefits that cannot be matched by other popular tax saving instruments such as PPF, NPS, NSC, equity mutual funds or even long term fixed deposits that are eligible for tax benefits on investment.
How? Consider this. All investments that are eligible under tax saving sections such as Sec 80C offer tax saving based on the amount invested – subject to the overall cap of Rs 1.5 lakh. Some of them like PPF and tax saving equity mutual funds also carry the advantage of zero tax when the investment is redeemed. With other eligible investments, the income on redemption or even income accruing every year is taxable – this reduces the returns you get. Insurance has a special feature – no tax is payable on the proceeds of an insurance policy. So, you get tax benefits when you pay the premium amount every year and do not have to pay tax when the policy matures. Those are two strong benefits for sure.
But, there is one standout feature of insurance policies which no other product offers – which makes it worth the while to make insurance a priority product when it comes to utilising your tax saving limit. An insurance product gives you a huge umbrella of protection, even with a very low ‘downpayment’. How? Here’s how it stands out. The moment you pay out the first premium, the product gives your family & you a protection of a sum several times the premium amount. So, if you pay Rs 10,000 as premium for the first year, you can be eligible for up to Rs 50 lakh of insurance cover – right from the first month. This is unlike any other product. In every other product, the umbrella available is equal to the amount invested. In PPF, NSC, NPS, equity mutual funds and so on, the cushion is equal to the accumulated amount at a point of time.
“Life insurance is a very important part of one’s financial well-being. Insurance should be given priority over investments for anyone who has dependents. This makes life insurance a good tool to not only save taxes but also ensure your family is protected,” says Archit Gupta, Founder & CEO ClearTax.com, a leading tax advisory portal.
In fact, even if you are a young professional you can view life insurance, especially term cover, as the preferred tax-saving option, say experts. “A term insurance is a good option as it can provide substantial tax savings as well as an insurance cover. For young professionals who are just starting out with their career, maybe in their late 20s or early 30s, and have limited funds to invest and insure, this is one option that provides multiple benefits. Of late, with the new directive by the IRDA, ULIPs are again proving to be a viable investment vehicle that can provide good tax savings depending on the investment horizon,” Atrey Bhardwaj, AVP-Business Operations & Partner Management, BankBazaar.com
Insurance policies come in various forms, but with generous tax advantages. These could be term plans, endowment plans or ULIPs which offer a combination of insurance protection and investment in stocks. While term plans give a large umbrella of security with a low payout, ULIPs provide the option to grow yearly savings into substantial wealth over a period of time; the insurance cover bundled with ULIPs provides the protection several times higher than the amount invested in the initial years.
Tax Benefits – Summarised
Investing in insurance products come with two kinds of tax sops – deduction from your taxable salary and exemptions from paying taxes.
According to Section 80C and 80CC of the I-T Act, individual taxpayers and Hindu Undivided Families can claim deduction of upto Rs 1,50,000 per annum on premium paid on insurance policies. However, you can avail of this deduction if your premium paid is up to a maximum of 10 per cent of the total sum insured of the policy that is issued on or after April 1, 2012. For policies issued prior to March 31, 2012, tax laws permit deduction on premium payment of up to maximum of 20 per cent of the sum insured. Thus, if your premium payment exceeds 20 per cent of the sum assured, then you can claim deduction only up to 20 per cent of the sum assured.
The treatment of pension plans is slightly different on this. Section 80CCC allows deductions for premiums paid towards pension plans for up to the maximum of Rs 100,000.
On the exemption side, any sum received through a life insurance policy is exempt from taxation. These could be any money received as maturity payout or death benefits. Thus, in case of any unfortunate event happening to the policyholder, the nominee would not have to pay taxes on the amount received.
You can get your tax benefits if you invest in life insurance products in the name of your spouse or your children.