Tax saver: How to save income tax through strategic life insurance planning? Expert answers

Benjamin Franklin coined the famous phrase, “A penny saved is a penny earned.” That sentiment may have been true two hundred years ago, but these days a penny saved can be two pennies earned with interest. While this quote brings a smile to our faces, it also reminds us that we need a financial plan that helps us save on taxes. 

Nitin Mehta, Chief Customer Officer & Head of Digital Business at Bharti AXA Life says financial planning is not just about investing wisely to save tax; it's also about protecting oneself and one's loved ones from unforeseen circumstances. He states, "One way to do so is by including life insurance. Life insurance is a powerful tool that achieves both financial security and smart investments through tax efficiency. In India, life insurance policies offer several tax benefits that can translate into significant savings for policyholders."

The Chief Customer Officer & Head of Digital Business at Bharti AXA Life says life insurance trumps other assets due to its tax benefits. "Unlike investment avenues, which can come with legal hassles, stamp duties, and maintenance expenses, insurance pay-outs are made promptly and without deductions. Moreover, while FDs, stocks, and gold may attract taxation and market volatility, life insurance policies provide tax savings," he adds.

Talking about tax-saving benefits of life insurance, he lays down the following pointers — 

· Deductions under Section 80C: Premiums paid towards most life insurance policies qualify for deductions under Section 80C of the Income Tax Act, 1961. This deduction, up to a limit of Rs 1.5 lakh annually, can reduce your taxable income and, consequently, your tax burden.

· Tax-Exempt Maturity Proceeds: The maturity proceeds or death benefit received by the beneficiary of a life insurance policy are generally tax-exempt under Section 10(10D) of the Income Tax Act. This exemption ensures your loved ones get the full benefit of the insurance pay-out without any tax deductions.

· Tax Benefits for Critical Illness Riders: Many life insurance products offer critical illness riders. Premiums paid towards these riders are eligible for deductions under Section 80D, providing additional tax advantages.

He enunciates the strategies for tax-efficient insurance planning with these 3 pointers —

1) Tax-deferred Growth: Life insurance policies with an investment component, such as ULIPs (Unit Linked Insurance Plans), can offer potential growth of your investment over time. The gains accumulated within these policies are tax-deferred,

2) Tax-Free Withdrawals/Loans: Some life insurance policies allow you to make partial withdrawals or take loans against the policy's cash value. These withdrawals or loans are generally tax-free, providing you access to funds in times of need without immediate tax implications.

3) Estate Planning: Life insurance plays a pivotal role in estate planning. By strategically designating beneficiaries, you can ensure that your assets are transferred smoothly and your loved ones are financially secured. Also, the insurance pay-out can help offset any estate taxes or other liabilities, easing the financial burden on your inheritors.

While life insurance offers potential tax savings, Nitin Mehta reminds that it's crucial to align one's choices with financial objectives. He shares these 3 important considerations — 

1) Needs Analysis: Before purchasing a life insurance policy, conduct a thorough need analysis to determine the appropriate coverage, considering your dependents, liabilities, and long-term financial goals.

2) Product Selection: Choose a life insurance product that suits your risk profile, investment preferences, and financial needs. Options include traditional plans like endowment policies, money-back plans, or market-linked ULIPs.

3) Professional Guidance: Consulting with a financial advisor or insurance expert can help you make informed decisions about life insurance. They can assess your unique situation and recommend the best policies for your circumstances.

The Chief Customer Officer & Head of Digital Business at Bharti AXA Life states that other financial tax-saving instruments have their advantages, but they cannot replace the financial security and liquidity that life insurance provides. "Life insurance ensures that your loved ones receive a substantial pay-out that can help them maintain their lifestyle and secure their financial future. Hence, life insurance is an essential component of a comprehensive financial plan. by understanding the tax benefits associated with life insurance policies and adopting strategic planning, you can not only protect your family's financial future but also optimize your tax savings," he sums up saying.

(Disclaimer: Tax benefits are as per Income Tax Act 1961 and subject to amendments therein from time to time.)