How to avail tax benefits through insurance?

How to avail tax benefits through insurance?

Every financial planning culminates in March- the last month of financial year. People are looking forward to get tax benefits through buying insurance. You can avail both (a) deductions from taxable income and (b) exemption of proceeds from tax.
Tax Benefits can be availed through both life insurance and health insurance.

Whenever we talk about tax benefits, there are 3 sections of the Income Tax Act 1961 that we come across time and again- Section 80C, Section 80D and Section 10(10D). Let’s discuss them further:

Section 80C: This section lets you avail tax benefits to maximum amount of Rs 1 lacs. The annual premium that you pay is deducted from your taxable income. However there are two conditions:

• The benefit for premium is restricted to 20% of actual Sum Assured 
• The policy has to be continued for at least 2 years or it will result in reversal of benefits taken.

Example: Mr. Bhandari takes life insurance plan with Sum Assured of Rs 2 lacs. The maximum premium benefit he can avail is 20% of 2 lacs is Rs 40,000. If he pays premium of Rs 50,000 only Rs 40,000 will be considered.

So one should always take Sum Assured as 5 times the annual premium to fulfill the 20% condition.
If Mr. Bhandari surrenders policy after one year, then tax rebate taken will be reversed in the following year.

Section 80D: A person can avail tax benefits by buying health insurance or commonly known as mediclaim policy. The maximum deduction for individuals is Rs 15000 and for senior citizens, it’s Rs 20,000. However the maximum tax deduction combined could be Rs 35,000 if individual buys health insurance for himself and his parents who are senior citizens.

Section 10(10D): The Sum Assured provided to the nominee as death benefit after the insured person passes away is completely tax free.
One-third portion of pension value at vesting age is exempted from tax.

Before making your plans to avail tax benefits, one should always look at his or her financial portfolio. A visible balance has to be maintained between liquid cash and long term assets. An illustration will make things more clear:

Arvind has annual net income of Rs 6 lacs. After paying for the household expenses, children school fees and other miscellaneous expenses, he saves around Rs 2 lacs. He keeps Rs 1 lacs as his emergency money in savings account. He begins his tax planning and invests Rs 40,000 in child ULIP plan and Rs 15,000 for health insurance policy. The rest of amount is invested in pension plan. By doing careful systematic tax planning, he saves Rs 8,000 yearly. As a result of tax planning, he maintains good balance between liquidity and future assets.