Categorized | Life Insurance

Use of Life Insurance in Tax Planning

Tax planning is one of the important aspects of financial planning. Not only does it help in reducing your tax liability but through this you also ensure yourself a secure future as you are forced to save that chunk of money through one way or the other.

Therefore, while you plan your investments, tax planning should be an important aspect to consider. The government provides various incentives for savings in certain instruments and these incentives often come in the form of exemption in tax payment. The various sections of the Income Tax Act provides for exemptions in tax payment if an individual invests his or her savings in some certain types of instruments. Life insurance is one such instrument which enjoys tax exemption. Therefore, if you are investing in life insurance, you become automatically eligible for income tax exemption under Section 80C of Income Tax Act and you can Claim this exemption on your taxable income upto the limit of Rs 100,000.
 
Two Fold Benefit

The tax benefits you avail from your investment in insurance thus provide you two fold benefits. On one side, you save tax and save a chunk of your hard earned money, and on the other side, you also get returns on your investment in life insurance. Investment in life insurance is a win-win situation for you.
 

Traditional Life Insurance Plans


There are several types of life insurance plans available in India today. The traditional life insurance plan provides you safe returns as it usually invests your Premium in government securities, bonds and debt funds. The rate of return is relatively lower than other life insurance products that invest in equity market, etc. Actually, it all depends on your requirement, expectations and appetite for risks, on the basis of which you determine the type of life insurance plan.

Unit Linked Insurance Plans

These days, a large number of people also invest in Unit Linked Insurance Plans (ULIPs). The ULIPs invest your premium in a mix of fixed-income government securities and capital markets which makes them investment insurance products. The rate of return is generally higher than the traditional life insurance plans, in the long term. The ULIPs may not be able to provide you the rate of return, which you expect, in the short Term largely due to volatility in the capital markets. However, in the long term horizon of 5-15 years, the rate of return provided by ULIPs is comparatively higher than traditional life insurance plans.

ULIPs as Part of Tax Plan

The plus point in case of ULIPs is that apart from tax saving you can also enjoy superior returns. Yes, you can claim Tax Benefit in your income tax returns under section 80C of the Income Tax Act.

You can also consider using online tax calculator facility to figure out your tax liabilities after deducting various exemptions. These online tax calculators are generally fed with applicable tax exemptions as applicable under the Income Tax Act.