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How is Life Insurance a Tax-Saving Tool?

 
 

Among the several tax-saving instruments available in India, life insurance is perhaps the only one that offers multiple benefits. It provides life cover, income protection as well as reduction in tax. There are two types of tax benefits one can claim with life insurance - Deduction Benefit and Exemption Benefit.

Deduction Benefit

This refers to the deduction for premium paid towards life insurance policies from the taxable income. It is available under multiple sections of the Income Tax Act.

Under Section 80C of the Income Tax Act

Individuals and members of Hindu Undivided Family (HUF) can avail the benefit, provided the insurance policy is taken in the name of the:

  • Individual
  • His/her spouse
  • His/her children

According to Section 80C, this benefit can be availed only for investments in life insurance policies up to a maximum of Rs. 1,50,000. Additionally, there are some clauses regarding the deduction available:

Policy PeriodDeduction Allowed For
For policies issued on or after 1st April 2012Premium amount valued up to a maximum of 10% of the sum insured
For policies issued before 31st March 2012Premium amount valued up to a maximum of 20% of the sum insured

Under Section 80CCC of the Income Tax Act

Deduction is available only on pension plans, which are a specialised form of life insurance policies. It is available on policies where the premium amount is a maximum of Rs. 1,00,000.

Under Section 80D of the Income Tax Act

Individuals and members of HUF can avail this benefit if the policy is taken in the name of the individual, spouse or children. For this, deduction is available for a maximum amount of Rs. 15,000. If the policy is availed in the name of the individual's parents, then an additional deduction benefit of Rs. 15,000 is available.

In case the parents are senior citizens, a higher deduction amount up to Rs. 20,000 is allowed.

Under Section 80DD of the Income Tax Act

The benefit is available on the premium paid for a policy taken in the name of a disabled dependent. The deduction eligibility amount is a maximum of Rs. 50,000 each year, and Rs. 75,000 in case of severe disability, as defined in the policy document.

Exemption Benefit

As per this benefit, any amount received from a life insurance policy is exempted from tax. Under Section 10 (10D), the amounts received from a life insurance policy that will be exempted from tax are bonus, or Section 80DD (3) or under Keyman Insurance Policy.

Thus, a life insurance policy provides life cover as well offers tax benefits for policyholders, making it an ideal tax saving tool that one should have in their portfolio.

You may be entitled to certain applicable tax benefits on your premiums and policy benefits. Please note that all the tax benefits are subject to tax laws prevailing at the time of payment of premium or receipt of benefits by you. Tax benefits are subject to changes in tax laws.

 
 
 

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