How Can Life Insurance Help You Save Tax?

2-August-2021 |

Introduction

One thing this pandemic has taught everyone is that life is uncertain. No matter how much we may plan for the future, we can never plan for an unknown crisis. Advanced financial planning for such uncertainties is important for everyone, irrespective of their income levels. Nowadays, you can get everything insured, from your business and health to your life. When it comes to life insurance, most people are still unaware of its benefits, including how it can be used to save tax*. People still question whether it is worth investing in a life insurance policy. Before we talk about its usefulness, let us understand the meaning of life insurance.


What Does Life Insurance Mean?


As the name suggests, life insurance is a protective financial cover on the life of the insured. Alternatively, it can be called a Guarantee1 long-term savings plan that provides financial support to the dependents of the insured post the insured’s death or after the expiry of a specified period. An individual can avail of many benefits through life insurance. Some of them are listed below:

 

  • Creation of wealth.

  • Financial security.

  • Tax* benefits.

  • Better savings.

  • Coverage from different risks.

  • A suitable plan for every financial need.

  • The facility of loan.

 
How Can Life Insurance Help Save Tax*?

If there is a common question that unites all taxpayers, it is how to save tax through life insurance. Tax saving is an integral part of every individual’s financial planning. Now, we know that we can reduce our taxable income by investing in tax-saving schemes. The higher your investments in such tax-saving options, the lower is your taxable income. From PPF, mutual funds, NPF to tax-saving life insurance plans, individuals can now find several tax-saving schemes under different sections of the Income Tax Act, 1961. Renowned companies like Tata also offer Tata AIA Life Insurance savings plans customised to the life goals of individuals. Let’s discuss how this long-term savings plan works for an individual to save tax.

 

  1. First, the benefits of life insurance can be availed under Section 80C of the Income Tax Act, 1961. The government has allowed a maximum of ₹ 150,000 per year as a deduction to individual taxpayers under this section. This amount of deduction is against the amount of premium paid for the life insurance policy taken by the individual. Therefore, the person claiming such a deduction must present a receipt proof of such premium payments.

 
Eligibility for this deduction

Certain terms need to be checked before an individual can claim this deduction under Section 80C. The following are the terms and conditions:

 

  • The premium amount must be paid during the financial year in cash or through other banking modes

  • The premium must be paid for self, spouse or dependent children

2. Tax benefit In case of a disability

Now, there may be cases where the insured suffers from a disability, or an individual has taken the insurance for a family member who has a disability. In such cases, the Section 80C deduction is available to the person only if the following conditions are met:

 

  • Firstly, the disability should be mentioned and covered by the list of disabilities under Section 80U or the terminal disease list mentioned under Section 80DDB of the Income Tax Act, 1961.

  • Secondly, the premium paid on the life policy should not exceed 15% of the sum assured.

3. Tax benefit on maturity amount received

Section 10(10D) of the Income Tax Act, 1961 deals with the benefits received through a life insurance plan. The benefits included under this are maturity, surrender, or death benefits. The receiver of the maturity amount receives the benefit of tax exemption on such maturity amount under Section 10(10D). However, this exemption is available only if the premium paid satisfies below mentioned conditions:

  • If the insurer has taken a policy before 1st April 2012, the annual premium paid on the policy should not be more than 20% of the sum assured.

  • If the insurer has taken a policy after 1st April 2012, the annual premium paid on the policy should not be more than 10% of the sum assured.

  • Sum assured means the minimum assured amount which the survivor will receive under the policy.

If the premium paid is more than 10% of the sum assured, the exemption will not be granted, and the income will be fully taxable.


4. TDS on the maturity amount

Certain life insurance policies are not covered under Section10(10D). In such cases, if the maturity amount received is less than ₹ 100,000, no TDS is deducted on such an amount. However, the maturity amount is fully taxable in the hands of the receiver.

If the maturity amount exceeds ₹ 100,000, TDS will be deducted from such amount, but it can be claimed when filing the subsequent ITR.

In Union Budget 2019, the rate of TDS has been revised to 5% on income in the form of proceeds paid or payable on or after September 1, 2019.


5. Surrender benefit

In pension plans, there is no tax benefit on policy surrender. However, if other plans are surrendered, certain points need to be noted for claiming tax exemption. They are:

  • In the case of Single premium plans

Where only a single premium needs to be paid under the traditional life insurance plans, the tax exemption on surrender value in such cases is only available if the policy is surrendered after the completion of 2 years.

  • In the case of regular premium plans

Where regular premiums need to be paid, the premium should have been paid for 2 years to claim any tax benefits on the surrender value in such cases.

  • In the case of ULIPs

There is usually a lock-in period of 5 years in ULIPs. Hence, the tax benefit on the surrender value is only available on the expiry of the lock-in period.

 

The Final Words

Life insurance is a product that offers an individual financial cover and the ability to invest and get returns. After reading the above article, we hope you have an idea of how one can save tax* through life insurance plans. Tata AIA Life Insurance, through its guaranteed1 return plans, offers customized life insurance plans suitable to your life goals. To conclude, before investing in tax*-saving insurance plans, research thoroughly, analyze your financial goals and invest in one accordingly.

 

People also ask:

  1. How much does life insurance save on taxes?

  2. What are the tax benefits under a life insurance policy?

  3. Are all life insurance tax-free?


L&C/Advt/2021/Aug/1347

Need help to choose the right plan?

+91

By submitting your details, you are giving your consent to receive SMS/Call by Tata AIA Life Insurance Company Limited or its representative, with reference to this solicited inquiry even though you may be registered on the DND list. L&C/Advt/2019/Jan/075

Disclaimer
  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.

  • 1Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry

  • IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER

  • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.

  • Past performance is not indicative of future performance.

  • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.

  • Please make your own independent decision after consulting your financial or other professional advisor.