Avoid buying life insurance just to save income tax

Despite there exists a general assumption that life insurance is a medium to avoid the income tax liability to a huge limit, one shouldn’t think of saving income tax as his main aim of purchasing a life insurance policy. However, this is a hugely believed wrong concept. The life insurance deals has grown rapidly in India because of the efforts put up by million agents, and lakhs of employees of insurance firms like LIC, who showed the importance of financial security through life insurance to nearly each household in urban and rural areas, the Financial Express reported.

The report states, the phenomenal increasing efficiency of insurance salesmen in the past quarters of a fiscal, nonetheless, believes on the fact that life insurance is sold just for saving personal tax. It’s partly correct that in the last quarter most people concentrated on selling and buying life insurance for such benefits. There exists a large unit of people who would like to reduce tax liability after paying life insurance premium in the required year.

Insurance and tax gains

Under section 80C of the Income Tax Act, 1961, one can avail deductions from income on premium payment to purchase and continue the current life insurance policy on his own life, wife and child.  U/s 80C allows a maximum deduction limit till Rs 1.5 lakh. However, the tax bracket includes investments made in deferred annuity policies and payment to provident fund, investment in ELSS of the mutual funds. This is in addition to the premium paid under group savings linked insurance schemes.

The primary reason to buy a life insurance policy should be the price of a human life which needs to be exchanged using the policy if the insured passes away while he is earning. The qualifying premium amount for such deductions from income cannot be above 10 per cent of the sum guaranteed. However, persons suffering from serious disability or disease can get deductions from premium till 15 per cent of the sum guaranteed. Policies taken before April 1, 2012 can get a fixed deduction of 20 per cent of the sum ascertained.

Ending a policy

Policyholders cannot avoid deductions from taxable income if they end a policy quickly in the upcoming years for which deductions have previously been taken. If the life insurance policy is claimed by single premium mode, do not give away the policy before completing two years from the date of first premium received. In case of unit linked insurance plans, the retention period is five years minimum and for the rest two years.

Few life insurers provide health insurance or important health insurance coverage as extra benefit under the life insurance policy. A separate deduction till Rs 25,000 can be claimed by the policyholder u/s 80D. The amount can touch till Rs 30,000 if a senior citizen has such policy. One paying premium for their parents can also avail such deductions.

Tax-free maturity earning

The maturity earnings earned by the policyholders or their representatives/successors are totally exempted from tax liability u/s 10 (10D). However, maturity earnings in terms of Keyman insurance policy us 80DD are not exempted from income tax.

Life insurance is a suitable tool to offer financial security to the persons who rely on the earning members. The tax exemptions are only incentives paid by the government for motivating people to purchase life insurance in the un-availability of comprehensive social security system. Income tax benefits must be taken up as a reason to buy life insurance. Persons who assume that life insurance business banks up on tax efficiency to survive must change their understanding of the greatest financial tool, the Financial Express reported.

(With agency inputs)