How Can Life Insurance be an Effective Tax Planning Tool for You?

Tax planning is an important financial objective for employed and self-employed individuals in our country. It encourages people to invest in financial products to save on taxes. However, the benefit of investing in various financial products also help them to plan for their family's financial security, future family commitments, save for retirement etc. And among the financial instruments available in India, life insurance to save tax* is considered effective based on its product features and benefits.

However, it needs to be best utilised for maximum protection and tax advantages. Let us understand and explore in this regard.

 

Life Insurance and Tax Benefits

Life insurance plans such as term insurance is a long term agreement between you and your insurer, wherein your insurer agrees to provide a lump sum death benefit to your family in case of your unexpected demise. Life insurance plans have evolved to provide varied policy features to enhance the benefits beyond just a life cover. For instance, the Criticare Plus Benefit of our Tata AIA term insurance plan, Instaprotect Solution⁺, provides financial assistance to manage the treatment expenses for 40 critical illnesses on the first diagnosis. And, in case if you are hospitalised, the plan covers the hospitalisation, ICU admission costs, etc.

 

While such life insurance plans provide varied financial assistance, it helps you save on tax^*.

 

Life Insurance Tax Deduction - The premium amount you pay towards purchasing the term plan qualifies for a tax^* deduction under Section 80C of the Income Tax Act, 1961. It reduces the taxable income up to ₹1,50,000. And, if you have opted for a health rider^#, you can additionally save up to ₹25,000 under Section 80(D).

 

Life insurance Tax Exemption - The lump-sum benefit from life insurance policies are tax^*-exempt under Section 10(10D) of the Income Tax Act. Therefore, your family does not have to pay taxes^* on the lump sum death benefit they receive on your unexpected demise.

 

So, let us consider two different scenarios explaining life insurance tax benefits.

 

Scenario 1:

Mr Krishnan is the sole earning member of the family. He has his wife, three children and dependent parents at home.

Therefore, he is responsible for their survival and other commitments such as his children's education, parents’ medical expenses, etc.

He earns a handsome salary and has funds in his savings bank account that provides an interest income, as furnished below.

Annual salary	₹9,00,000
Annual interest income from savings bank account	₹40,000

His expenditures towards school education for children and medical expenses for parents are as follows:

Annual School fees	₹10,000
Medical insurance for senior citizen parents	₹36,000

 

This scenario is common to a middle-aged group individual in India not aware of the benefits of purchasing in a life insurance plan.

His income tax^* calculation based on the old tax regime is as follows:

Particulars	Amount(₹)
Annual salary	₹9,00,000
Income from other sources	₹40,000
Total	₹9,40,000
Less standard deduction	₹50,000
Less tax deduction on savings income(Section 80TTA)	₹10,000
Less tax deduction on school tuition fees(Section 80C)	₹2400
Less tax deduction on medical expenses for parents(Section 80D)	₹36,000
Net Taxable Income	₹841600

 

Income Tax Slab(₹)	Rate	Income Tax(₹)
Up to ₹2,50,000	Nil	Nil
₹2,50,000 - ₹5,00,000	5%	₹12,500
₹5,00,000 - ₹10,00,000	20%	₹68,320
Total tax payable		₹80,820

 

The interest income from his bank saving account qualifies for a tax deduction up to ₹10,000 under Section 80TTA. His children's school fees get eligible for tax^* deduction up to ₹100 per month per child up to a maximum of two children. Also, as his parents are covered under a health insurance policy, their medical expenses qualify up to ₹50,000 for tax deduction under Section 80(D).

The total tax payable is ₹93,200.

Scenario 2:

Let us consider if Mr Krishnan opts for a life insurance plan with a health rider^# for critical illness and has the same income and expenditures as Scenario 1.

Additionally, let us consider that he invests in a term insurance plan (annual premium ₹20,000) with a health rider^# (annual rider premium ₹5,000) considering his family history of cancer.

His income tax calculation as per the old regime is as follows:

 

Particulars	Amount
Annual salary	₹9,00,000
Income from other sources	₹40,000
Total	₹9,40,000
Less standard deduction	₹50,000
Less tax deduction on savings income(Section 80TTA)	₹10,000
Less tax deduction on school tuition fees(Section 80C)	₹2400
Less tax deduction on medical expenses for parents(Section 80D)	₹36,000
Less term insurance premium(Section 80C)	₹20,000
Less amount spent on health rider#(Section 80D)	₹5,000
Net Taxable Income	₹816600

 

Income Tax Slab(₹)	Rate	Income Tax(₹)
Up to ₹2,50,000	Nil	Nil
₹2,50,000 - ₹5,00,000	5%	₹12,500
₹5,00,000 - ₹10,00,000	20%	₹63,320
Total tax payable		₹75,820

 

His savings in the life insurance plan gets a tax deduction of up to ₹20,000 under Section 80(C). And, as he had opted for a health rider^#, he gets an additional tax deduction of ₹5,000 under Section 80(D).

 

His net taxable^* income decreased drastically, reducing the income tax payable to ₹75,820. Therefore, investment in a life insurance plan effectively reduces your taxable^* income.

 

And, more importantly, it helps your family reduce their financial burden in case of your unexpected death. Also, suppose you get diagnosed with a critical illness such as cancer during the policy term. In that case, you will get the insured amount payable on the diagnosis for your hospital and medical expenses.

 

Conclusion

Purchasing a life insurance plan provides a life cover to help your loved ones manage their financial expenses in case of your unexpected demise. In addition, it provides varied tax* benefits in the form of deductions and exemptions to reduce the taxable income effectively. You can also customize the product features based on your income and family commitments to best suit your needs. Therefore, make sure you invest early in life to maximize the tax^* advantages of life insurance.

 

L&C/Advt/2022/Feb/0234