Taxes are a big aspect of our financial lives, and it is critical that we examine every option to reduce our tax liability. While mutual funds, PPFs, FDs, and NPS are some of the investment options that may be used to save taxes, insurance can also be used to save taxes. It is a strategic tool for tax optimisation, not just a protective cover.
Following the fiscal year 2023-2024 budget announcement, there have been some modest changes to the insurance tax framework. Nonetheless, a well-chosen insurance plan can provide clients with not only financial security but also possible tax savings.
Tax Breaks for Life Insurance Premiums
Individuals can claim a tax deduction of up to 1.5 lakh on premiums paid for life insurance products under Section 80C. This deduction typically applies to life insurance policies that cover the individual, their spouse, and their children. It is critical to note that the term of the life insurance policy must be at least five years in order to qualify for this tax benefit.
There have also been adjustments to ULIP tax regulations, where the tax-exempt status of ULIP earnings will be impacted if the total premiums across all ULIP policies owned by an individual exceed 2.5 lakh per year, as defined by Section 80C.
Health Insurance Premium Deductions
Section 80D allows for tax savings in the case of health insurance. Individuals can deduct up to $25,000 for health insurance that covers them, their spouse, and their children. Furthermore, for parents aged 60 and up, the deduction maximum is 50,000, and for parents under 60, the deduction limit is 25,000.
Hindu Unified Family policyholders who support a disabled family member can claim exemptions of up to 1.25 lakh under Section 80D. There is also a provision for tax exemptions of up to $5,000 for preventive health check-ups. This exemption is available to the policyholder, his or her spouse, children, and even parents.
Pension Plan Tax Advantages and Phases
Pension plans or annuity plans are a subset of life insurance that strive for a different end. A life insurance policy protects the insured's family in the event of the insured's death, whereas a pension plan tries to offer financial stability for the individual and their family during the individual's lifetime. Pensions are often divided into two stages: accumulation and withdrawal.
Individuals save money during their earning years during the accumulation period. The withdrawal phase begins once retirement begins. Tax advantages apply mostly during the accumulation period of pension plans. The primary benefit of a deferred annuity is that it allows for tax-free income growth during the accumulation phase.
This means that the money set aside during premium payments grows tax-free, giving the consumer a tax break. There is also the option of withdrawing during vesting, in which a third of the accrued cash can be withdrawn tax-free.
Consumers should recognise that life and health insurance should not be viewed primarily as a way to save money on taxes. They are critical financial tools that provide life insurance, protect against unforeseen calamities, and sometimes double as savings vehicles or income supplements.
As a result, obtaining these insurances at a young age is a wise decision. However, before purchasing any insurance plan, it is critical to conduct extensive research and properly compare options.
