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Life insurance has been a useful tax planning tool for quite some time and not unjustifiably so. With so many options in life insurance available, you can not only save immediate tax but also plan and save for long Term goals. There are so many benefits attached; life cover, investments, savings, child education planning, life stage planning and even retirement planning. Life insurance allows planning for long term goals in a tax-effective manner. The benefit of tax deduction is available for Premium paid on life insurance policies under Section 80C of the Income Tax Act
How Much Benefit – Under Section 80 C the maximum benefit that one can get is up to Rs 1 Lac from the taxable income from investments made in specified instruments, life insurance being one of them. So life insurance premium up to a maximum of Rs 1Lac can be exempt from tax in case investments towards none of the other specified instruments are being considered.
Who Can Benefit – There are some basic conditions as to who is eligible for Tax Benefit on insurance premium. To begin with it is the Proposer who benefits if he/she buys life insurance or Health Insurance for self spouse or. Paying life insurance premium for anyone else will not benefit you. You can still benefit from health insurance for parents. So keep in mind, for whom you are buying and what type of insurance are you buying.
Premium vs. Coverage – The premium must be within the specified limit of the coverage. That is the coverage should not be in excess of 20% of sum assured. If so, the amount applicable for tax deduction is lesser than the actual premium. E.g. for a coverage of Rs. 2Lac, the maximum premium that can be considered for tax benefit is Rs. 40,000. If your premium exceeds this limit, it is not tax deductible.
Policy holding period – It is the minimum period for which you need to keep the policy. If the Policy is terminated before that, the benefit is reversed. So if the premium paying term is a minimum of three years, you need to pay at least three premiums and even after that hold the policy active for the minimum duration. Further if you do not pay premium even if the policy is active, you won’t get the tax benefit.
Premium paid for Health Insurance is also eligible for tax deductions under section 80D. Maximum deduction allowed is Rs 15,000 and for senior citizens aged above 65 years, it is Rs 20,000.This is apart from Rs. 1Lac deductions you avail under Section 80C.