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Tax Saving: How life insurance can help you save tax under Section 80C, 10(10D) and 80D

tax saving, income tax saving, life insurance, Section 80C, section 10(10D), section 80D, taxable income, last minute tax saving

Many of us defer tax planning or income tax investments until the last financial quarter or to the last financial month of March. This leads to hasty investment decisions just to save tax, which might not be a judicious move. Investments should be made in such a way that it enables you fulfil your life goals. Here are a few things to keep in mind before investing in tax-saving instruments.

Know your taxable income

Before you start tax-saving investments, you should be aware how much tax you need to pay. For that you have to know your taxable income. The taxable income does not include any amount which is received against furnishing of bills. An individual s income is subject to tax at three different rates depending on the taxable income as stated below for FY 2018-19:

To understand how taxable income is calculated, let s take an example. Assume a person is earning Rs 6 lakh as taxable income every year net of all deductions, then the first Rs 2.5 lakh would not attract any tax. The amount between Rs 2.5 and Rs 5 lakh would be taxed at 5%, i.e. Rs 12,500. The amount exceeding Rs 5 lakh, which is Rs 1 lakh in this case, will be taxed at 20% or Rs 20,000. So total tax liability of this person would be Rs 32,500 plus cess of Rs 1,300/- i.e. Rs 33,800/-

However, Section 80C of the Income Tax Act, 1961 allows you to claim up to Rs 1.5 lakh in deductions if that money is invested in tax saving instruments such as life insurance products, Employee Provident Fund, fixed deposits, National Savings Certificate and tax-saving mutual funds, among others. By investing the entire Rs 1.5 lakh in tax saving investments, one can save up to Rs 46,800 tax every year. (Calculated on investment of Rs. 1.50 lakh @ 31.20%)

Choose the right tax-saving product

Tax-saving investments should be made in such a way that they are part of your larger investment portfolio which helps you achieve your life goals. Life insurance plans offer almost all the solutions for medium and long-term financial planning, and they also double up as tax saving investments.

As per the Income Tax Act, 1961, you can avail tax benefits by investing in life insurance. Let us look how:

Section 80C: You can claim deductions of up to Rs 1,50,000 under Section 80C against the premium paid for a life insurance policy during the year, be it Term plan, Unit Linked Insurance Plan, Retirement plan, Investment plan, Child plan or Savings plan. In case of ULIP, the policyholder will need to hold the policy for a minimum period of five years and in case of any other life insurance policy, it should be retained for a minimum of two years from the start date of the policy.

To be eligible for this deduction, the total premiums paid in a year should be less than or equal to 10% of the sum insured. For instance, if the sum assured is Rs 50 lakh and the annual premium paid is more than Rs 1.5 lakh, then the deduction is capped at Rs 1.5 lakh. This is applicable if the policy is purchased after April 1, 2012.

These deductions are available for policies taken in your name, or in the name of your spouse or child.

Section 10(10D): The maturity benefit and death benefit under Life insurance policies are also tax free under Section 10(10D) of Income Tax Act, 1961. The only condition is that the annual premium should be less than or equal to 10% of the sum assured for policies purchased after April 1, 2012.

Section 80(D): If you buy a health insurance and critical illness policy, you can claim a deduction of Rs 25,000 in a year against the premium paid, under Section 80(D) of the Income Tax Act, 1961. This limit goes up to Rs 50,000 in case of a senior citizen. Under this section you can also avail tax reduction of Rs 5,000 for preventive health checkups in a year.

Further, medical insurance premium paid for parents or legal guardians is additionally qualified for deductions up to Rs 25,000 in a financial year. This limit goes up to Rs 50,000 a year if your parents are senior citizens. Keep in mind that the premium for health insurance or critical illness policy needs to be paid through netbanking, cheque or debit or credit card. No benefit is allowed for cash payments.

Life Insurance goes beyond Tax Savings

While life insurance plans emerge as one of the preferred tax-saving investment options, they offer many more benefits which make them a value-packed investment solution to achieve all your life goals. The most important benefit being that it comes with a life cover, providing financial security to you and your family in case of an untoward incident which could impact yours and your family s life goals.

Second, products like ULIPs that come with a lock-in period and are long-term (5-10 years or above) investment options, not only bring in a disciplined approach to your investments, but also allow you to take advantage of the power of compounding and rupee cost averaging, thus letting your money grow over time. Such products also offer you a diversified investment portfolio to help you build a large wealth corpus to achieve your long-term financial goals.

Third, critical illness covers from life insurance companies help manage the financial burden that arises when a critical illness strikes within the family and enable you to keep their life goals journey on track.

Clearly, life insurance caters to various needs of investors apart from just tax savings. However, before investing in any tax-saving instrument, you must sync them with your life goals and begin planning at the beginning of the year. This approach will help you channelize your savings appropriately.

(By Manish Sangal, Chief Agency Officer, Bajaj Allianz Life Insurance)

(Disclaimer: The opinion expressed by the Author in this article is his personal opinion and readers are advised to seek independent financial advice before making any investment decision)