Buying insurance plans merely to save tax is not recommended. However, if it is part of your financial planning, it not only provides you cover but gets you tax benefits as well.
Although tax planning is ideally handled through the course of the financial year, many still peg the start of any given calendar year as the time when they make investments and financial decisions to help them reduce their tax outgo. Instruments such as the Employee Provident Fund, Public Provident Fund and ELSS Mutual Funds are good tax saving options, but you can also use the below-mentioned Insurance products for the same purpose.
Life Insurance may refer to several products, including Term Plans, money back policies or ULIPs. While term plans offer pure insurance, the others merge insurance with investments. From the purview of tax planning, however, all of them qualify for a deduction under Section 80C of the Income Tax Act. Note that you can opt for a maximum deduction of Rs. 1,50,000 under this section.
Similarly, purchasing a Health Cover also provides tax benefits on the premiums paid on it. This is a deduction offered under Section 80D of the Income Tax Act, up to a maximum of Rs. 25,000 for the insurance of self, spouse and dependent children.
This deduction rises to Rs. 30,000 if the individual or spouse is over the age of 60. In addition, a further deduction of Rs. 25,000 is available for the insurance of parents if they are less than 60 years of age and Rs. 30,000 if they are over 60.
Investing in a pension plan is another way you can use to improve your security blanket. You will also gain tax benefits under Section 80CCC of the Income Tax Act. Also known as Annuity Plans, they are different from Life Insurance in that the tax benefits are only applicable when you pay your premiums during the accumulation phase. Since Section 80CCC falls under Section 80C, it doesn’t have its dedicated limit on deductions.
To sum it up, insurance is a product that everybody should consider. Purchasing insurance plans merely to save tax is not recommended. Align it with your tax planning activity through a financial year and you’ll stand to benefit from the cover provided as well as the resultant tax benefits.