Insurance for tax benefits-Things to know before you buy

Insurance for tax benefits
When it comes to tax planning, the first instrument come in mind of majority of the people is Insurance. Most of us leave tax planning till the end of financial year. Buying insurance for tax benefits, under Section 80C of the Income Tax Act, life insurance premium up to a maximum of Rs 1.5 lakh per financial year qualifies for tax deduction. Insurance has very different purpose but normally people overlook its purpose and buy it as a tax saving instrument most of the time.

But after new tax regulations one must clearly know which life insurance premium provide tax relief. Now many insurance product will not provide the tax relief as much the premium amount you have paid, and this may land you in trouble due to shortfall in tax paid.

Which Insurance premium can be claimed for tax relief.

Any premium paid for life insurance cover of self, spouse and children are eligible for deduction under section 80C. Premium paid for life insurance cove of parents, brother or sister or any other relative are not eligible for deduction under section 80C. Again it should be kept in mind that maximum deduction allowed under section 80C in a financial year is Rs. 1.5 Lac only.
Insurance for tax benefits

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How much premium is allowed for deduction under section under 80C

Any policy issued before 31/03/2012 including the day must have 5 time risk cover of the total annualised premium for claiming the whole premium for tax relief under section 80C. Policies which are issued on or after 01/04/2012 must have the 10 times risk cover of annualised premium to claim tax deduction on full premium. Same thing applies to the single premium policies. It should be kept in mind is that the risk cover is total death sum assured in the policy (Eg. Death sum assured in Jeevan Anand policy of LIC of India is 125% of basic sum assured).

If any policy which do not full fill this criteria then the tax deduction will be equal to eligible premium ie 20%  of risk cover for policies issued on or before 31/03/2012 and 10% of risk cover is policy issued on or after 01/04/2012.

Example: If you have taken a policy of Sum assured Rs. 1000000 on 01/05/2012 and the total annualised premium is  Rs. 120000 then you can claim tax relief of Rs. 100000 only (10% of the sum assured), but if the same policy is taken on or before 31/03/2012 then relief can be claimed on whole premium amount as it is more the 20%  of the sum assured in policy.

TDS on Insurance payments

Before 01/10/2014 there was no TDS deduction on the insurance payments. Now insurer are deducting TDS at the rate of 2% for policy where PAN details are available and 20% if the PAN details are not available for those policy which do not full fill the criteria laid down for tax deduction under section 80C ie annualised premium must be less than or equal to 20% of sum assured if issued on or before 31/03/2012 and 10% if issued on or after 01/04/2012.
There is no TDS deduction of a policy holder if all the payments from insurance products  is less than Rs. 100000 in a financial year. Other wise TDS will be deducted @ 2% where PAN is available or @ 20% if PAN is not available.
Insuring your own life is absolutely different aspect than tax planning and both should not be mixed. One must take insurance to get adequate risk cover on own life and tax benefit is a part which you get automatically with insurance. Just do not buy insurance for tax benefits only.
To know more about the section 80C you can visit site of income tax department, to visit site Click Here

1 Comment on "Insurance for tax benefits-Things to know before you buy"

  1. This is very helpful article regarding Life Insurance.We are following the tax benefits limits what ever you suggested.

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