How to Save Taxes with Life Insurance?

Investing in a Life Insurance policy is a smart way to secure your family. But Life Insurance also has other benefits apart from financial protection. For instance, you can use it to build wealth or even avail of a loan in some cases. Life Insurance is also an effective tool to save taxes.However, it is important to understand your insurance needs before purchasing Life Insurance rather than selecting it as a last-minute tax-saving instrument. The tax benefits are an additional incentive.It is also important to note that if you want to avail these tax benefits, you must file your taxes under the old tax regime, not the new one. Also read: How to create wealth with Life Insurance

You can claim tax benefits on premiums, health riders in your insurance plan, and maturity or death benefits you receive when you exit the plan. Let's look at the various tax sections under which you can claim these benefits.

Section 80C

You are eligible for tax deductions on annual premium payments for your Life Insurance policy. You can claim a maximum of ₹1.5 lakhs as tax deductions under Section 80C of the Income Tax Act of 1961 annually.

Section 80CCC

Section 80CCC applies to Life Insurance policies that provide pension or annuity benefits. You can claim a deduction for your pension plan, the premium you pay for pension plans under this section. The maximum deduction available to claim under Section 80C and 80CCC together is ₹1.5 lakhs.

Section 80D

This section applies if you have Health Insurance as a part of your Life Insurance policy. For instance, you can enjoy tax benefits if your Life Insurance policy includes any medical or health-related riders or add-ons, such as hospital care, critical illness, and surgical care, you can enjoy tax benefits. You may file for deductions up to ₹25,000 under this section per fiscal year if you are under 60 years. If you are over 60, the deduction available is ₹50,000.

Section 80DD

If you have a disabled family member, you are eligible for a tax deduction under section 80DD. It allows you to provide for the dependent's needs with a certain level of relief.It is important to understand that you or your other family members can file for these deductions, not the disabled member themselves.This section allows for a fixed amount of deductions, irrespective of the actual expenditure.However, the severity of the disability determines the amount of deduction.

• Where the disability is more than 40% and less than 80%: ₹75,000.
• Where the disability is more than 80%: ₹1.25 lakhs.

Section 10 (10D)

The Section 10 (10D) benefits apply to the sum insured, i.e., the lump sum amount you receive either on maturity or your beneficiaries receive in case of your untimely demise, whichever happens first.Union Budget 2023 made important changes in income tax policy for Life Insurance tax benefits under Section 10(10D).The new rules are as follows:

• Maturity proceeds from your Life Insurance policies become taxable if your annual premium payments exceed ₹5 lakhs. It applies to all Life Insurance policies purchased after 1 April 2023.
• The proposed tax does not apply to Unit Linked Life Insurance plans (ULIPs). With ULIPs, if your annual premium is over ₹2.5 lakhs, you cannot claim any tax exemption, and it is taxable as capital gains (not as income tax).
• The proposed change will also not affect the tax exemption available in case of the death benefit paid to nominees in case of the insured's death.

Also read: Options for paying Life Insurance premium Here are a few examples to better understand the 80C tax norms on Life Insurance premiums over ₹5 lakhs. Case 1: Suppose you purchase a Life Insurance policy in September 2022. The coverage is ₹75 lakhs. You pay a premium of ₹6 lakhs for the policy every year for the next 10 years. Since you bought the policy in 2022, the new rule does not apply to you. Hence, you do not need to pay any tax on the maturity amount of this policy. Case 2: Now, imagine you purchased the same policy in June 2023. The new rule comes into effect. So, you must pay tax at the time of receipt of the maturity proceeds under the head' income from other sources'. Here is how it gets taxed:

• Maturity proceeds - ₹75 lakhs
• Less: Premiums paid - ₹60 lakhs (₹6 lakhs x 10 years)
• Taxable amount - ₹15 lakhs

Case 3: You buy multiple life policies in a year. Suppose you buy three different policies in July 2023. The maturity proceeds, and policy terms are the same as in Case 1 above. However, the annual premium for the first policy is ₹2 lakhs, for the second policy, it is ₹3 lakhs, and for the third policy, it is ₹4 lakhs.Here, the total annual premium exceeds the ₹5 lakh limit the minute you buy the third policy. So, the maturity proceeds from the third policy become taxable at receipt. The other two policies remain tax-free.
The tax calculation is as follows:

• Maturity proceeds of the third policy - ₹75 lakhs
• Premium payment - ₹40 lakhs (₹4 lakhs x 10 years)
• Taxable amount - ₹35 lakhs

In the above calculations, it is assumed that you have not claimed the 80C deduction. Suppose you claim the 80C deduction up to the maximum limit of ₹1.5 lakhs annually. In that case, you must add the total amount claimed over the term of the policy (10 years in the above example) to the total maturity amount while calculating the taxable amount.Also, with Term Insurance plans, you need to pay GST at 18%. For endowment plans , the GST rate is 4.5% in the first year and 2.25% on renewal.

• Under the Income Tax Act, you can claim certain deductions on annual premium payments for your Life Insurance policies.
• There are also deductions on maturity amount or death benefit.
• Section 80C allows tax deductions up to ₹1.5 lakhs for annual Life Insurance premiums.
• Section 80CCC allows tax deductions on premiums for pension or annuity plans. The combined under 80C and 80CCC is ₹1.5 lakhs.
• Section 10 (10D) applies to lumpsum payouts as maturity proceeds or death benefits.
• Proceeds received from policies issued after 1 April 2023 will be taxable if the aggregate annual premium exceeds ₹5 lakhs. This rule does not apply to ULIPs and nominees receiving death benefits.