All premiums paid towards Life Insurance Policies are eligible for income tax deduction under section 80C of Indian Income Tax Act. Life Insurance Premiums paid till Rs 1,50,000 each year is eligible for 80C Tax Benefit and the same cannot be surrendered within 3 years of Policy Inception.
Under Life Insurance, one can choose to invest in
- Term Plans
- Endowment Plans
- Money Back Plans
- Child Plans
- Unit Linked Insurance Plans
- All of them qualify as Life Insurance Policy and the premiums are exempted from Income Tax Benefit.
How Much Benefit :
Under Section 80 C the maximum benefit that one can get is up to Rs 1,50,000 from the taxable income from investments made in specified instruments, life insurance being one of them. So life insurance premium up to a maximum of Rs 1,50,000 can be exempt from tax in case investments towards none of the other specified instruments are being considered.
Who Can Benefit :
There are some basic conditions as to who is eligible for Tax Benefit on insurance premium. To begin with it is the Proposer who benefits if he/she buys life insurance or Health Insurance for self spouse or. Paying life insurance premium for anyone else will not benefit you. You can still benefit from health insurance for parents. So keep in mind, for whom you are buying and what type of insurance are you buying.
Premium vs. Coverage :
The premium must be within the specified limit of the coverage. That is the coverage should not be in excess of 20% of sum assured. If so, the amount applicable for tax deduction is lesser than the actual premium. E.g. for a coverage of Rs. 2,00,000 the maximum premium that can be considered for tax benefit is Rs. 40,000. If your premium exceeds this limit, it is not tax deductible.
It is the minimum period for which you need to keep the policy. If the Policy is terminated before that, the benefit is reversed. So if the premium paying term is a minimum of three years, you need to pay at least three premiums and even after that hold the policy active for the minimum duration. Further if you do not pay premium even if the policy is active, you won’t get the tax benefit.
Health Insurance Benefit :
Premium paid for Health Insurance is also eligible for tax deductions under section 80D. Maximum deduction allowed is Rs 15,000 and for senior citizens aged above 65 years, it is Rs 20,000.This is apart from Rs. 1,50,000 deductions you avail under Section 80C.
Life insurance policies can be useful tax planning tools, because the policyholder is eligible for tax benefits under the Income Tax Act 1961 (Act). Though there are multiple modes for saving tax, life insurance is one of the most effective tax planning instrument.