A complete financial strategy must include a life insurance policy to give your loved one’s financial stability in the event of death. With life insurance, you may secure your family’s finances by helping to pay for bills, debt repayment, and income replacement.
Life insurance has essential tax advantages in addition to its principal value. Tax deductions are available for life insurance premiums, but death benefits and maturity proceeds are not subject to taxes.
These tax advantages can significantly increase the total value of your life insurance policy, making it a desirable choice for anyone looking to maximise their financial progress while safeguarding their family’s future.
Different Types of Life Insurance Tax Benefits
When you file your income under the Old Tax Regime, various life insurance tax benefits are available for different plans. Let’s understand them one by one.
- When you pay your premiums:
- What It Means:
Every time you pay a life insurance premium, you’re eligible for deductions under Section 80C of the Income Tax Act. This means you can deduct up to ₹1.5 lakh annually from your taxable income, instantly lowering your tax outgo. - How It Helps Your Growth?
The less you pay in taxes, the more you can invest or save. Over time, these savings can significantly boost your financial position. - When can you claim?
You can claim this at the time of filing your Income Tax Returns in the subsequent financial year.
- What It Means:
- Tax-free death benefit:
- What It Means:
The death benefit is always tax-free in the hands of the nominee, irrespective of the premium or sum assured amount, tenure of investment, type of life insurance plan, etc. - How It Helps Your Growth?
The nominee would never be taxed in case of a death claim on any type of life insurance plan, which could enhance the financial protection of your family and thereby enhance your financial situation when doing contingency financial planning! - When can you claim?
This would be provided only if and when the claim situation arises.
- What It Means:
- Tax-Free Payouts:
- What It Means:
The maturity benefit of life insurance plans is tax-free under section 10(10D) provided the sum assured is a minimum of 10 times the annualised premium for policies purchased after 1st April 2012 and a minimum of 5 times the annualised premium for policies purchased before 1st April 2012 subject to:- For traditional plans, the maximum premium that is eligible for tax-free maturity benefit is ₹5 lakhs per annum and
- For unit-linked insurance plans, the maximum premium eligible for tax-free maturity benefit is ₹2.5 lakhs annually for policies purchased on or after 1 February 2021.
Thus, as per Section 10(10D), the returns from ULIPs are tax-free if the annual premium is under ₹2.5 lakh. However, gains from ULIPs with annual premiums above ₹2.5 lakh are subject to Long Term Capital Gain tax at 10% on gains exceeding ₹1 lakh.
- How It Helps Your Growth:
Receiving a lump sum of tax-free money ensures that more of your wealth is protected from taxes, allowing you to reinvest or use it efficiently without any tax deductions. - When can you claim?
This can be claimed when you file your Income Tax Returns the year after the life insurance policy matures.
- What It Means:
- Tax-Free Switches for ULIPs:
- What It Means:
Unlike any other financial instrument in the industry, ULIPs have this massive advantage of availing tax-free switches for switching funds from equity schemes to debt or vice versa without any short-term or long-term capital gains implications! - How It Helps Your Growth:
Usually, capital gain/loss implications arise when switching between the different asset classes of equity and debt. But with ULIPs, this is tax-free, allowing you to switch between funds based on market situations freely. - When can you claim?
This applies to every switch as there is no TDS (tax deduction at source) or any other tax implications!
- What It Means:
- Pension Plans – Tax Relief in Retirement
- What It Means:
Premiums paid toward pension or retirement plans qualify for tax deductions under Section 80CCC, reducing your taxable income by up to ₹1.5 lakh. - How It Helps Your Growth:
You maintain financial stability in your later years by securing regular post-retirement payouts. Plus, the upfront tax savings let you invest more in the years leading up to retirement.
- What It Means:
- Health Riders – Added Protection, More Tax Savings:
- What It Means:
Like critical illness riders, health riders added to your life insurance policy protect you against unforeseen medical expenses and offer additional deductions under Section 80D up to ₹25,000 for premiums paid for yourself, your spouse and dependent children. - How It Helps Your Growth:
By saving on health and life insurance premiums, you increase your disposable income, allowing you to grow your wealth faster.
- What It Means:
Maximising Tax Benefits through Smart Planning:
Making strategic selections to optimise your life insurance coverage is necessary to maximise tax benefits through wise planning. Reduce premium amounts by paying yearly rather than monthly to maximise premium payments. Consider bundling life insurance with additional investment possibilities, like Section 80C-eligible investments, to take full advantage of tax savings.
Arranging premium payments to align with tax planning can also increase benefits. By holistically approaching life insurance and tax planning, you may save taxes, maximise benefits, and meet long-term financial goals.
Conclusion
Finally, tax advantages associated with a life insurance plan provide a vital means of promoting economic expansion. Policyholders can reduce their tax obligations and optimise their savings by taking advantage of tax deductions on premiums, tax-free death benefits, and tax-free maturity earnings.
Remember to pick the best policy term and coverage, maximise premium payments, and combine life insurance with other investment alternatives to benefit fully from the tax benefits associated with life insurance.
By adopting these tactics, you can take advantage of the life insurance tax benefits to the fullest extent possible and secure a better economic future for your loved ones and yourself.