How to Save tax via Insurance ?
Albert Einstein once said that, the hardest thing in the world to understand is the income tax. Well it rings true for many of us; with 31st March around the corner, it is high time to plan the finances and save up on taxes. The rules of income tax can be complicated and ever so dynamic, especially for those of us who do not belong to the finance industry. Thus, for a layman, it becomes very difficult at times to interpret the same and claim the maximum tax savings. Insurance policies often help us save taxes, so let us try to understand how it works and also find ways to be a smart taxpayer.
Premium paid for a life insurance policy qualifies for a tax deduction under Section 80C of the Income Tax Act. Life insurance has a sub-set of various products such as term plans, money back, whole life and ULIPS (unit linked insurance plans). Term plan gives you pure insurance whereas others are a mix of insurance and investment. However, for the purpose of tax, all these are treated equally by the Income Tax department. Tax saving can be done by purchasing any of these plans. The premiums paid by you on these policies can be used for availing tax deduction and hence boost your tax saving options.
Another savior can be Pension or annuity plans, although they are different from life insurance in the way they are invested. There are two phases in pension plans – accumulation and withdrawal phase. Tax benefits are applicable only in the accumulation phase where you pay premiums on them.
Other important aspects of our life are health and wealth. Life is never peaceful when you lack one of these. The importance of having health insurance or mediclaim policies has been stressed again and again by most financial advisers. ‘One medical emergency can ruin your financial life’ is a phrase we often hear in the personal finance space. Buying health insurance also provides tax benefits on the premiums paid on it. Other than these insurance policies Income Tax Act quite clearly lists the criteria that falls under tax deductions.
Under Section 80C, and all its subsections of Income tax Act 1961-2016 the amount not exceeding One hundred and Fifty Thousand Rupees (Rs.150, 000) and the amount paid or deposited under below options, are allowed under tax deductions.
- Premium for Life Insurance for self, spouse, or children.
- Deferred Annuities payable by self and the Government.
- Contribution towards Provident fund (PF) to which PF Act 1925 applies
- Contribution towards PFs set up by the Central Government.
- Contribution by an employee to a Recognized PF.
- Contribution by an employee to an approved Superannuation Fund.
- Subscription for a Government Deposit or Security.
- Subscription for Saving Certificates.
- Contribution towards Unit linked Insurance Plan (ULIP).
- Contribution towards ULIP of LIC Mutual Fund.
- All approved Insurance company’s Annuity Plans.
- Subscription to Notified units of Mutual Fund.
- Contribution to the Pension Fund of Notified units of Mutual Fund.
- National Housing Bank’s Pension Fund.
- Subscribing to the Deposit Scheme of a Public Sector companies allocating long-term financing for construction or purchase of house in India
- Tuition fees to any university, college, school or educational institution situated in India. For any two children.
- Repayment of housing loan taken for a residential property.
- Subscription to Mutual Funds units recommended by Central Board of Direct Taxes.
- An FD from a scheduled bank with a minimum tenure of 5 years.
- Subscription to bonds of National Bank for Agriculture and Rural Development (NABARD).
- Contributions to Senior Citizens Saving Scheme Rules 2004.
- Tax Saving 5 Year FD.
- Five year time deposit in an account under Post office time Deposit rules 1981.