How does insurance help you save tax?

Insurance is a great means to save tax. However, given the dynamic nature of tax rules on deduction of insurance premiums, one must stay abreast with the latest changes in taxation rules so as to be mindful of the same while purchasing insurance policies and get the best tax benefits available on such products

How does insurance help you save tax?

Income tax rules can be complicated and dynamic, especially for those who might not be familiar with financial terms. Hence, for a layman, it could get difficult at times sometimes to make proper sense of taxation laws and ensure optimum tax savings. 

Let us attempt to clear the confusion and understand the various tax provisions in finer detail. This will help you claim the best tax benefits available. 

First, the basics 

The premium paid for a life insurance policy is eligible for 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. 

Deductibles 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 buy life insurance policy for the self, or spouse and child (dependent/independent, major/minor, married/unmarried, no cap on the number of children). 
  • The life insurance policy can be of any form: pure term insurance, traditional plan, ULIP plan etc. 
  • The maximum amount of deduction under this section (for all insurance/investment avenues including the premium for life insurance) for a financial year is INR 1,50,000. 
  • A life insurance policy is eligible for a tax deduction (if the policy is issued after April 1, 2012) only if the premium is not more than 10% of the assured sum. For policies issued before April 1, 2012, the premium should not have exceeded 20% of the assured sum. 
  • If the policy is surrendered before two years (traditional policies) and five years (ULIP policies), the tax benefit also gets reversed. 

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

Deductibles 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 the deduction for health insurance. 
  • Only an individual or HUF, whether a resident of India or not can claim tax deduction under Section 80D. Hence, even NRIs or foreign citizens are eligible to claim deduction on premium paid for health insurance. 
  • Following payments are eligible for a tax deduction u/s 80D: 
  • - Premiums on health insurance policies; 
  • - Central Government Health Scheme (CGHS); 
  • - Preventive health check-up costs. 
  • The payments can be made for: self, spouse, dependent children (irrespective of the number) and parents (whether dependent 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. The premium for accident rider does not qualify for Section 80D. 
  • Deduction under Section 80D is available on ‘payment basis’ i.e. in the year the payment is made, irrespective of the year it relates to. 
  • Payment modes other than cash must be used for health insurance premium to be eligible for deduction.  
  • Only payment for preventive check-ups can be made in cash. 

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 health check-up 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

Hence, the total deduction available for parents (senior citizens) is INR 30,000. If you and/or your spouse are senior citizens too, you could avail the same benefits taking the total available deduction to INR 60,000 + additional INR 5000 too for family check-up. 

Difference between Section 80C and 80D 

  • Section 80C allows for a total deduction of INR 1.5 lakh per year, while Section 80D offers health insurance deductibles to the tune of INR 65,000. 
  • Other than life insurance, Section 80C includes an extensive range of financial products whose cumulative benefit amounts to INR 1.5 lakh. Section 80D exclusively provides benefits on expenses related to health insurance and preventive health check-ups for the family. 

Tax provisions keep changing based on healthcare policies, reforms and forecasts anticipated by the government in almost every budget. Hence, one should stay updated and understand the provisions properly to claim the maximum tax benefits, which effectively reduces the cost of these insurance policies.  

Making smart investments in insurance products can prove beneficial in the long run. Have a particular question about tax? Leave it in the comments below and we’ll help you with sound advice. 

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