Embedded Value: How buying a life insurance or mediclaim policy can help you save tax

As the end of the financial year approaches, people start worrying about their income tax liability and start exploring ways and means to minimise such liability through expenses or savings provided as ‘deduction’ from the total taxable income in the Income Tax Act. Most, however, end up either paying up more taxes due to ignorance or wrong advice by incompetent intermediaries or buy such plans of life and health insurance which bind them to such expenses for several years which do not conform to optimum tax saving planning or maximum protection requirement.

It is important for young people to understand the nuances of right tax planning through insurance products. Very soon we will be entering the last quarter of the financial year 2021-22, hence this is the time to do the necessary computation and transactions.

Income tax deduction
Premium paid to purchase or to keep in force a life insurance policy can be claimed as deduction from taxable income under Section 80C but the amount to be claimed should not be more than 10% of the sum assured in any year. Hence care should be taken while taking a policy that the term of the policy is at least 10 years or more. The maximum limit under this section for claiming deduction in a year is Rs 1,50,000. But the ceiling is inclusive of several other eligible investments such as NSC, PPF, EPF etc. Carefully choose a plan on the basis of requirement for protection to family during one’s crucial life stages and need of lumpsum money on retirement or even earlier to meet several social obligations.

Premiums paid under unit-linked insurance plan or under annuity plans offered by insurers are also eligible for such deductions. The advantage of buying well-planned insurance policies is that the taxpayer doesn’t have to buy a scheme every year. Premium paid every year can be claimed for deduction. The greatest advantage is that not only financial protection is guaranteed to the family but all maturity or death claim proceeds are treated as tax-exempt in the hands of the policyholders or the claimants except for certain minor exclusions.

Premium paid in respect of life insurance policy on the life of the spouse or children is eligible for tax relief irrespective of the age, employment or marital status of the children. Premium paid for policies on the life of parents is not eligible.

Tax benefits on health insurance
Under Section 80D, premium paid to purchase a health insurance policy for self, spouse and children is deductible from total income to the extent of Rs 25000 in a financial year. A further deduction of Rs 25000 is allowed if premium is paid for health policy on the life of parents. If the parents are above 60 years of age, then the limit is extended to Rs 50,000.

An individual can claim deduction under this section up to Rs 75,000 in a year. But if the individual is a senior citizen himself then the total exemption will be Rs 1,00,000. Premium paid under life insurance policies providing critical illness cover, etc., is also eligible for Section 80D deduction within the overall limit.

However, exemption cannot be claimed for premium paid on behalf of children having their own income or who are above the age of 25 years. This limit does not apply to unemployed and unmarried female children. Those who are contemplating buying a life insurance or a mediclaim policy must act now if maximum deduction for Assessment Year 2022-23 is desired.

The writer is former MD & CEO, SUD Life