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How does insurance help you save tax?

27 January 2016
Insurance is a great means to save tax. However, given the dynamic nature of tax rules on deduction of insurance premiums, one must keep oneself aware of the latest tax changes and rules so as to be mindful of the same while purchasing insurance, to get the best tax benefits that are available on such products.
 
 

The rules of income tax can be complicated and ever so dynamic, especially for those of us who do not belong to the finance industry. Thus, for a layman, it becomes very difficult at times to interpret the same and claim the maximum tax savings. Today let us clear the confusion & understand the tax provisions in finer detail, so that you can claim the best on what is allowed under the law.

First, the basics

Premium paid for a life insurance policy qualifies for a tax deduction under Section 80C of the Income Tax Act.

However, when it comes to health insurance, Section 80D of the Income Tax Act is what you have to check for claiming the deduction.

Tax deduction on life insurance

Following are the main conditions of claiming tax deduction for life insurance premium under Section 80C of the Income Tax Act:

  • This deduction can be claimed only by an individual/HUF.
  • Person can be a non-resident or even a foreign national.
  • An individual can take life insurance policy on his own life, or on the life of spouse and child (dependant/independent, major/minor, married/unmarried, no cap on number of children).
  • The life insurance policy can be of any form: pure term insurance, traditional plan, ULIP plan etc.
  • Maximum amount of deduction under this section (for all insurance/investment avenues including premium for life insurance) for a financial year is Rs. 1,50,000.
  • A life insurance policy qualifies for a tax deduction (in case policy is issued after April 1, 2012) only if the premium does not exceed 10% of sum assured. For policies issued before this date, premium should not have exceeded 20% of the sum assured.
  • If the policyholder surrenders the insurance policy before 2 years and 5 years respectively (for traditional and ULIP policies respectively), the tax deduction will also get reversed.

Related: Things you didn’t know about saving tax [Infographic]

Tax deduction on health insurance

Following are the main conditions of claiming tax deduction for health insurance premium under Section 80D of the Income Tax Act:

  • Only an individual or HUF can claim deduction under Section 80D. The person can be a resident or even a non-resident. So, NRI’s or even foreign citizens qualify to claim deduction for health insurance.
  • Following payments will qualify for a tax deduction u/s 80D:
  • Premium for a health insurance policy
  • Central Government Health Scheme (CGHS);
  • Cost of preventive health check-up
  • The payments can be made for the following relationships:
  • Self
  • Spouse
  • Dependent children (irrespective of the number)
  • Parents (whether dependant or not)
  • Only mediclaim and critical illness policies qualify for deduction under Section 80D of the Income Tax Act. Premium for personal accident policies unfortunately do not qualify for a tax deduction.
  • Premium of such a policy which can be attributed towards the critical illness rider in case of life insurance policy qualifies for a deduction u/s 80D of the Act. Premium for accident rider does not qualify for Section 80D.
  • Deduction under Section 80D is available on “payment basis” i.e. in the year you’ve made the payment, irrespective of which year it relates to.
  • Health insurance premium has to be paid in a mode other than cash to claim the deduction.

Related: Is your health insurance plan adequate to cover critical illnesses?

To help understand the deduction better, the provisions of Section 80D are explained in the table below:

For whose benefit payment can be made Self, spouse and dependent children Parents
Mediclaim insurance premium 25,000 25,000
Preventive head checkup 5,000 (included in the limit above) 5,000 (included in the limit above)
Additional deduction (in case policy  is taken on the life of a senior citizen) 5,000 5,000

Tax provisions are dynamic as they are tinkered around with in almost every budget. Hence, one should strive to keep up to date with an understanding of these provisions to claim the maximum tax benefit which effectively reduces the cost of these insurance covers. Have a particular question about tax? Leave it in the comments below and we’ll get back to you.

 

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