The Tax Benefits of Insurance You Need to Know About

Sep 12, 2023 / Reading Time: Approx. 5 mins

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The Tax Benefits of Insurance You Need to Know About

Taxes, one of the major concerns for individuals and businesses, can be a looming burden. However, the smart investor knows that the key to lowering the tax burden lies in making the right investment choices.

The Income Tax Act of 1961 extends a helping hand to taxpayers by providing specific exemptions on eligible investments. Among these avenues, tax-saving mutual funds, fixed deposits, pension plans, PPF, and insurance policies stand out as popular options. This article elucidates the tax benefits of insurance (including life insurance and health insurance) that every taxpayer must be aware of.

The Indian government and the Income Tax Department have offered a range of provisions designed to facilitate deductions on insurance premium payments.

Whether employed individually or in combination/group, these deductions effectively lower your taxable income, resulting in annual tax savings for the duration of your active insurance plan. Whether you acquire a life insurance or health insurance policy for yourself or your dear ones, the premium payments you execute will be eligible for these tax deductions.

Tax Benefits of Life Insurance

The Indian government, in conjunction with the Income Tax Department, has established various provisions to enable deductions on premium payments for life insurance. These deductions, whether utilised individually or collectively, effectively reduce your taxable income, allowing you to save on taxes for each year that your life insurance plan remains active.

Below, we have outlined some well-known tax deductions that can effectively decrease your taxable income when holding a life insurance policy:

Section 80C:

A commonly used tax deduction by life insurance policyholders in India falls under Section 80C of the Income Tax Act of 1961. To secure a life insurance plan, policyholders are required to make premium payments, which are monthly instalments paid to the insurer.

Under Section 80C, these premium payments for life insurance can be subtracted from your total income up to a maximum limit of Rs 1.5 lakh per fiscal year. This consequently trims down your overall taxable income, serving as a substantial advantage for life insurance policyholders.

This deduction can be claimed by both individuals and Hindu Undivided Families (HUFs). In the case of individual policies, tax deductions are available to the policyholder, their spouse, and their children.

To qualify for tax benefits on life insurance under Section 80C, certain conditions must be met:

  • For individuals who purchased a life insurance plan on or before March 31, 2012, tax deductions apply to the total premium amount, limited to a maximum of 20% of the sum assured.

  • For individuals who bought their life insurance plan on or after April 01, 2012, tax benefits can be claimed for the entire premium amount, capped at a maximum of 10% of the sum assured.

  • In the case of individuals who are disabled or suffering from a critical illness and purchased a life insurance policy on or after April 01, 2013, tax benefits can be availed of only if the premiums equal or exceed 15% of the total sum assured.

Section 10 (10D):

The primary purpose of a life insurance policy is to provide financial security to your beneficiaries. In the case of insurance-cum-investment plans, the maturity benefit (investment + returns) is transferred to the beneficiary. Conversely, in the unfortunate event of the policyholder's demise, the sum insured is transferred to their loved ones (nominee/s) as a predetermined amount known as the death benefit.

The tax advantage linked to this amount lies in Section 10 (10D), where the entire sum is entirely exempt from taxation. This exemption also extends to the maturity amount received at the end of a life insurance plan with a money-back feature.

To be eligible for tax benefits on life insurance under Section 10(10D), specific conditions must be met:

  • If the life insurance policy is issued on or after April 01, 2012, the total premium paid should not surpass 10% of the total sum assured.

  • In instances where the maturity benefits from the life insurance policy exceed Rs 1,00,000 and the policyholder's PAN card information is available, a TDS (Tax Deducted at Source) of 1% will be applicable.

  • If an individual holds multiple life insurance policies issued after April 01, 2023, and the combined premium amount surpasses Rs 5 lakh, then the maturity proceeds will be subject to taxation.

Section 80CCC:

You can claim a deduction from your taxable income for the premiums you pay toward pension policies, with a maximum limit of Rs 1,50,000. However, do note that the surrender amount of the plan or the pensions/annuities received is subject to taxation under the current tax regulations.

Section 10(10A):

As per the Section, the amount received upon the commutation of a pension policy (accumulated pension amount) is not subject to taxation.

Section 80CCE:

The overall limit for tax deduction under Sections 80C, 80CCC and 80CCD(1) is Rs 1,50,000.

Tax Benefits of Health Insurance

Through the regulatory framework established by the Insurance Regulatory and Development Authority of India (IRDAI) and the provisions of the Income Tax Act, the Government of India extends tax deduction benefits for health insurance premiums and associated medical expenses exclusively to individuals and Hindu Undivided Family (HUF) taxpayers.

These deductions apply to the following insured categories:

  • Self

  • Spouse

  • Dependent children

  • Parents

Entities such as companies or firms are not eligible for deductions under Section 80D, and tax benefits can only be claimed against premiums paid for the aforementioned relationships.

Section 80D:

Apart from providing financial security during medical emergencies, health insurance also serves as an effective tax-saving tool. Premiums paid for health insurance policies offer tax exemptions under Section 80D of the Income Tax Act, 1961, for individuals and their families, including spouses, children, and parents.

These tax benefits apply regardless of the chosen insurance plan, whether individual, family floater, senior citizen, or top-up. Below are the details of tax deductions available under Section 80D:

For Self And Family:

You can claim up to Rs 25,000 per fiscal year for yourself and your family (spouse and dependent children).

If the eldest family member (self/spouse) is 60 years or above, you can claim up to Rs 50,000 against premiums paid for your family's health insurance.

For Parents:

You can claim up to Rs 25,000 separately for premiums paid for parents below 60 years.

If your parents are senior citizens (above 60 years), you can claim up to Rs 50,000 for premiums paid for their health insurance.

For Members of HUF And Non-Resident Individuals:

Members of HUF and non-resident individuals can claim a deduction of up to Rs 25,000 for premiums paid for themselves, family, and their parents.

For Health Check-up Facility:

In addition to premium payment deductions, Section 80D allows a tax deduction of up to Rs 5,000 per fiscal year for health check-ups. These preventive check-ups help identify illnesses at an early stage. This deduction falls within the above-mentioned admissible limits for insurance premiums.

Section 80DD:

A tax deduction of a maximum of Rs 75,000 can be claimed for premiums paid toward the health insurance of a dependent with a disability. This amount is based on expenses for nursing, medical treatments, rehabilitation, and more. In cases of extreme disability, a deduction of up to Rs 1.25 lakhs can be claimed. Dependents eligible for this deduction include spouses, children, parents, and siblings. Supporting medical documents must be submitted to claim this deduction under Section 80DD.

Section 80DDB:

If you or your dependents, including spouse, children, parents/guardians, and siblings, are undergoing treatment for specified illnesses or ailments, you can claim a tax deduction of up to Rs 40,000 under Section 80DDB.

However, this amount is subject to caps on medical conditions. If you are claiming for yourself, a family member, a sibling, a parent, or a senior citizen, the tax benefit extends to Rs 1 lakh. This includes medical treatments for diseases or ailments specified in Rule 11DD of the Income Tax Act.

Important Note Regarding Health Insurance Tax Benefits:

These tax benefits apply when premiums are paid via various electronic methods like internet banking, mobile banking, cheque, draft, debit card, credit card, or Unified Payment Gateway (UPI). Cash payments for health insurance premiums do not qualify for tax deductions under these sections.

Additionally, tax benefits do not apply to group health insurance or corporate health insurance provided by employers. However, payments for preventive health check-ups, even if made in cash, can be claimed as deductions.

To conclude:

By taking advantage of these deductions, individuals who hold life insurance and health can significantly minimise their tax obligations. The availability of tax benefits for the insurance plans, coupled with the convenience and accessibility they offer, is driving their increasing popularity among those seeking insurance coverage.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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