How Do I Save Tax With a Life Insurance Policy? When someone starts working and earning money on his own, a life insurance policy is typically the first investment he makes. Everyone wants to assure his safety as well as the protection of his loved ones in case of his passing, and the best method to do so is especially through a life insurance policy.
Read: How to Claim Life Insurance Policy?
What is Income tax?
The government of India imposes an income tax on the earnings of individuals and corporations during a fiscal year. Tax revenue goes to the government. This money is used by the government for several welfare programs, infrastructure upgrades, healthcare, and educational services, as well as payments to farmers and the agricultural sector.
The income generated by these taxes serves as a means of financing public services, paying off debts owed to the government, and supplying commodities. In addition to the central government, numerous states and local authorities also levy income taxes.
The two main types of taxes are direct taxes and indirect taxes. Taxes are calculated using the applicable income slab rates for that fiscal year.
What is a Financial Year?
For accounting and financial reporting purposes, the taxpayers use a one-year term known as the financial year. It’s the year that the income is generated. The Income Tax Act states that this time frame runs from April 1 through March 31 of the following calendar year. “FY” is used to shorten it. For instance, FY 2022–23 can be used to refer to the fiscal year that begins on April 1 and ends on March 31, 2023.
What is an Assessment Year?
The one-year period starting on April 1 and ending on March 31 after the fiscal year is the assessment year. Because all taxpayers are required to assess their income earned throughout the fiscal year and pay taxes at this time, this period is known as the assessment year. Due to the policyholder’s eligibility for tax benefits under the Income Tax Act of 1961, life insurance plans are important tools for tax planning. There are several ways to reduce your tax burden, but life insurance is one of the best tax preparation tools.
The taxpayer can deduct the premium paid for the life insurance policy under Section 80C, and any proceeds received from the policy are exempt from tax if they meet the requirements outlined in Section 10(10D) of the Income Tax Act of 1961. Policy purchases made in the names of the taxpayer, their spouse, and their children are eligible for deductions.
How is Income Tax Calculated?
Let’s first understand how taxable income is calculated about the tax-saving investments you make. You should understand the nuances of investing in a life insurance policy to reduce income taxes. Let’s assume that the taxable portion of your income is Rs. 5,000,000. This means that your tax liability for the year will be determined using your income bracket of Rs 5,000,000. Therefore, if a particular investment option, for example, is said to offer a tax benefit of up to Rs 50,000 per year, then this Rs 50,000 is deducted from your taxable income, which is Rs 5,00,000. Your tax obligation will now be calculated using Rs. 4,50,000.
The Sections Under Which Policy Holders Get Tax Benefits.
Section 80C: This section focuses on the tax advantages available on the premiums that policyholders pay for their insurance plans. Tax relief is available under Section 80C for premiums paid for life insurance policies. This is one of the finest tax advantages for life insurance policyholders because total deductions are permitted under this Section up to Rs. 1.5 lakh. To be eligible for this benefit, you must, however, make sure that your premium payment does not exceed 10% of the policy’s total sum insured. If your policy’s sum promised is Rs. 10 lakhs, for example, you must pay up to Rs. 1 lakh to qualify for this benefit under Section 80C.
Section 10(10D): 10D of Section 10 of the Income Tax Act of 1961 protects a life insurance policy’s earnings.
There are no upper limits on the benefits that may be received under this section; therefore, they are all completely exempt from taxation. Additionally, this benefit could be anything, such as a death benefit, maturity benefit, or even the payment made for canceling the insurance policy. However, if you want to forego your insurance coverage, there are a few more factors to consider.
- If the policy is surrendered after the first two years have passed, the surrender benefit is not subject to taxation. This applies to standard, single-premium life insurance products.
- If you have paid premiums for a standard premium policy for a total of two years, you are only eligible for a tax exemption on the surrender benefit.
- To get the tax benefits if you choose a Unit-Linked Insurance Plan (ULIP). In that case, you can only surrender the policy once the 5-year lock-in period has passed.
Section 10(10A): The Income Tax Act of 1961 particularly addresses pension plans, whether they are included as ULIPs or as standard life insurance policies. Due to Section 10(10A), the one-third portion of the corpus that you can withdraw for vesting purposes is tax-free under your pension plan. Since the remaining amount is paid as annuities, which are not tax-free.
Article 80CCC: Section 80CCC also covers pensioners. more precisely, the premiums paid into the pension or annuity plan.
This section includes the benefits under Section 80C as well as the tax exemption for premium payments up to a maximum of Rs. 1.5 lakh. As a result, if you are contributing to a pension plan, the total of both Sections of your tax exemption is capped at Rs. 1.5 lakh.
Conclusion
The tax advantages of life insurance are just one of the factors that make these products the most sought-after financial products. The Canara HSBC Life Insurance iSelect Star Term Plan offered you several additional advantages, such as customizable plans where you can choose how often you pay premiums as well as how the sum assured is paid to your nominees. I hope you like the post How Do You Save Tax With a Life Insurance Policy? If you learn from here then please do share with others.
