How to Use Life Insurance to Save Income Tax?

If you are a cricket fan, you must have watched the India versus West Indies series in December 2019. Apart from the remarkable performance by the Indian team, led ably by Virat Kohli, what was interesting about the series was the launch of the “Sabse Pehle Life Insurance” campaign.

A joint initiative by the Indian life insurance industry, the purpose of this mass media campaign is to raise awareness about the importance of life insurance. And understandably so. 

Life insurance is one of the most critical parts of your financial health. In fact, true to what the campaign says, life insurance is something that you should get first, even before you begin investing. 

Here are three reasons why you should get life insurance as early as possible

1. It provides your dependants with a financial cushion in the event of your untimely death
2. Insurance premium for the same cover gets expensive as you grow older
3. You can save income tax on the insurance premium you pay

Tax benefits on life insurance premium

The life insurance premium you pay in a financial year is tax-deductible under the Rs 1.5 lakh limit of Section 80C of the Income Tax Act.

This means that if you pay Rs 50,000 as a premium for your life insurance cover, then this amount can be deducted from your annual taxable income. The limit here is Rs 1.5 lakh under Section 80C.

What’s more, it’s not just the premium you pay for your own life insurance that is tax-deductible. The premium you pay for your spouse’s and child’s life insurance can also be deducted to save taxes under Section 80C. 

One caveat here is that the entire premium will not be tax-deductible if it exceeds 10% of the sum assured of your life insurance policy. This means that if you have a life insurance policy with sum assured of Rs 5 lakh and your annual premium for the same is Rs 60,000, then the entire Rs 60,000 will not be tax-deductible. Only 10% of the sum assured, which is Rs 50,000 in this case, will be tax-deductible.

For policies issued on or before 31 March 2012, an annual premium up to 20% of the sum assured can be used to save taxes.

Nevertheless, the life insurance premium can easily help you meet the Rs 1.5 lakh limit under Section 80C. The other options to save taxes under Section 80C include ELSS funds, PPF, 5-year FDs, school tuition fees, etc.

Insurance policies that qualify for under Section 80C

In India, life insurance is almost synonymous with LIC - the Life Insurance Corporation of India. Life insurance policies are often referred to as LIC policies. This has also led to the misconception that only the premium paid for LIC policies can be used to save taxes under Section 80C.

The truth is that premium paid to any IRDA-approved life insurance company is eligible for tax saving under Section 80C. This includes private insurance providers as well. 

Apart from this, the premium paid for the following types of policies qualify for tax deduction:

• Term insurance
• Endowment plans
• Unit linked insurance plans 

Can tax benefits of life insurance be overturned?

Yes, this can happen. As a policyholder, you have to pay premium regularly for a minimum number of years to retain the tax benefit. In case the policyholder is unable to pay a premium as required then the tax benefit can get overturned.

Here’s the fine print:

• Generally, the premium has to be paid for at least 2 years 
• Deductions are not allowed on the premium paid in the year in which the policy is being surrendered or terminated
• Deductions claimed in the earlier years will be considered as income for the year in which the policy is surrendered or terminated 

In a nutshell, life insurance is important because it brings you protection for your loved ones and tax-saving for yourself. Get it as early as you can and start taking advantage of this dual benefit.