Wealth Guide: How can life insurance help in tax planning?

The months from January to March are considered to be key months when salaried individuals undertake their tax planning process.

An activity which requires great attention to detail but unfortunately often carried out in a rushed manner.

Most people invest in tax-saving products without evaluating their features and understanding their benefits.

When comparing different financial instruments, it is advisable to choose an option that offers the critical benefits of assured corpus building, sustainable flexibility and value appreciation, and of course considerable tax savings.

We spoke to Anil Kumar Singh, Chief Actuarial Officer, Aditya Birla Sun Life Insurance Company Limited (ABSLI) on how life insurance plans qualify for tax benefits:

In my opinion, Life Insurance is one of the most underrated tax-saving instruments if one considers the ease of accessibility and value provided by protection products.

Although the main objective of a life insurance policy is to provide financial protection for an individual’s family in case of death or disability of the life insured, it also acts as a rewarding tax shelter.

Some of the preferred life insurance products include term plans, money-back and whole-life policies and ULIPs (unit linked insurance plans). Term plans give you pure protection whereas others are a mix of insurance and investment.

All types of life insurance plans qualify for tax benefits on entry and redemption. All these are considered by the Indian Income Tax department for the purpose of availing tax benefits.

Let’s understand tax benefits offered by life insurance products:

A) One can avail a tax benefit by way of deduction towards premium paid on life insurance policies up to Rs. 150,000 under Section 80C of the Income Tax Act, 1961. This also includes premium paid by the person for life insurance for spouse or child.

B) Under Section 80CCC, if one has taken any pension/annuity plan, he/she is allowed a deduction up to Rs. 1 lakh. On maturity of the accumulated amount, 2/3rd of the income gets taxable, while the remaining 1/3rd is tax-free.

C) If the nominee claims the insurance money in case of the life insured’s unfortunate demise, the claim amount is also tax-deductible under Sec 10D. The same benefit is extended to Unit Linked Insurance Plans (ULIPs) and retirement plans under Section 80CCC.

D) Therefore, under Section 80CCE, the overall limit for deduction u/s 80C, u/s 80CCC and u/s 80CCD (1) is Rs. 1,50,000/-.

E) Unlike other savings instrument, life insurance has an additional EEE benefit – the amount one invests, the amount that one’s investment earns and the amount that one finally receives is all exempted from income tax
 
However, one must keep the below points in mind before choosing life insurance as a tax-saving instrument:
 
1) A life insurance policy qualifies for a tax deduction (in case policy is issued after April 1, 2012) only if the premium does not exceed 10% of the sum assured. For policies issued before this date, the premium should not have exceeded 20% of the sum assured.

2) If the policyholder surrenders the insurance policy before 2 years and 5 years (for traditional and ULIP policies respectively), the tax deduction will also get reversed.

How to select the right Life Insurance cover?

As you can see, Life insurance is a comprehensive tool for effective tax planning. Before opting for a life insurance policy though, it is wise to bear in mind that life insurance is uniquely different from all other financial products because it has the protection of your financial interests as its core proposition and thus should be the foundation of your financial plan.

You should ideally assess your annual income, current liabilities, existing insurance cover, your age, number of dependents and future financial goals, while ascertaining the most suitable plan and rider options with adequate sum assured.

Remember that while purchasing insurance can help you save tax, it is advisable to be mindful of the latest changes in taxation rules and invest with a prudent eye.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)