Vishal worked with a multinational company in the metropolitan city of India. He had an annual package of Rs.15 lakhs. Out of this, every year, he spent Rs.11 lakhs on household expenses and tax deductions. Vishal was married and lived with his dependent parents, wife, and one daughter. With the growing age, Vishal thought that he should try and save as much as possible to create a fund for their daughter’s education. Moreover, he wanted that apart from the financial security, he should also buy a life cover. Vishal was the only earning member who pushed him hard to think about all ways to save money.
After discussing the matter with his financial advisor, Vishal realized that he should find ways to save taxes. Different tax-saving strategies can help you create a financial asset and get a life cover. If you have been unaware of ways to save tax similar to Vishal, this will be a good read for you.
Let us quickly jump to why tax saving is essential and how to save tax?
Why do you want to save taxes?
Saving tax is not running away from your contributions towards the nation’s growth. But it is about planning that part of the expense which otherwise can be of some benefit to your family. Essentially, individuals rush into saving taxes through different financial instruments from January to March.
But if you want to avoid last-minute stress seeing your money drain unnecessarily in the name of the tax, you should plan the ways to save taxes.
- Save your salary from deductions: Buy investment policies like life insurance that help you save taxes. Your company HR may deduct a portion of the wages in January, February, and March. To protect the amount, submit all the documents properly indicating that you have complied with your income tax responsibilities.
- Save Tax, Grow Wealth: Make sure that you plan tax savings through life insurance policies well in time. Buying policies last minute will help you only to save taxes. On the contrary, completing this job on time will keep you better and create some wealth for your family.
- Buy the best insurance plan to save tax: Saving tax is the motive that can quickly be done through buying an insurance plan. A life insurance cover can protect you in the manner you want, but only if you explore the product options correctly. For example, term insurance can help you save tax, and at the same time, it allows you to create a fund for your family in case of an unfortunate event. The amount of money collected helps the dependents in the family to manage expenses when you are not there to take care of them. Hence, the term plan enables you to save tax deductions and solves your purpose of saving money.
If this hits your mind and pushes you to focus on other life insurance products that can help you save tax like Vishal, you must explore the consequences.
Life Insurance Policies can help you save taxes.
A life insurance policy guarantees to receive the benefit after the policyholder passes away during the policy term, provided all the premiums were paid. If you own a product, you can also file for the tax exemption under section 80C of the Income Tax Act, 1961. Other than claiming the benefit of tax savings on premium paid, you can also ask for tax savings on the maturity amount under section 10(10D) of the Income Tax Act.
- ULIP Plans: A combination of insurance products and savings, a ULIP plan is a long-term duration product. The idea is to help the buyers create a considerable fund for the family members. Apart from protection, the ULIP plan also provides a life cover that pays the nominee after the policyholder’s death within the policy term. Here are the life insurance policies that can help you save taxes:
- Term Plans: The purest and the traditional form of life insurance is a term plan. The policyholder pays the premium for the policy term. If any unfortunate event occurs during the policy period, the sum assured is given to the nominee.
- Savings Plan: Another type of life insurance that allows people to create a money fund. People buy savings plans to collect money for different stages of life. The programs are of different types like money back, income guarantee, and others. The project offers the policyholder a life cover other than saving money. This feature pays the nominee if anything happens to the policyholder until the policy expires.
- Child Plans: Thinking of saving money for your child’s future but not doing so. Buy a child insurance plan to financially secure the child’s future even if something happens to the parents. Under this plan, pre-defined payouts are released at crucial life milestones.
- Health Plans: Health plans save tax deductions under Section 80 D. It allows you to take care of your parents’ health when you cannot afford the high-rising medical costs of treatment. Health plans pay you a lump-sum amount to diagnose any specified critical illness.
- Pension Plans: Buy pension plans to receive money in lump sum payments or regular income after retirement. The plan allows you to avail tax benefits throughout until you file for tax exemptions.
You can buy a combination of life insurance policies to build your tax-saving strategies. Next, we look at the stages to claim the income tax deductions.
How to save income tax with Life Insurance Plans?
Life Insurance products and solutions, you can save tax on your hard-earned money under the Income Tax Act of 1961. In addition, at certain stages of the policy, you may be eligible for tax benefits.
Stage 1: Entry Advantage – Life insurance saves you from tax under Section 80C (life insurance), 80CCC (pension), and Section 80D (health).
Stage 2: Earnings Advantage — Your investment with us has the potential to grow while still being tax-free.
Stage 3: Switching Advantage — You can switch between equity, debt, and balanced funds at any time, and the changes are not taxable.
Stage 4: Exit Advantage — Subject to the conditions under Section 10(10D) of the Income Tax Act, you receive a tax-free Maturity Benefit.
Sections explained under life insurance policies to save taxes.
Different tax benefits that you receive under life insurance policies to save taxes are:
- Section 80 C: The section allows you to claim tax deductions on the premium paid for self, spouse, or children. The maximum tax exemption allowed is Rs.1.5 lakhs. The cover amount can be higher, and the tip can be more, but the exemption limit is set.
- Section 10 (10D): The returns that you earn under different Life Insurance policies as maturity benefits are tax-free subject to conditions of Section 10(10D) of the Income Tax Act (1961).
- Section 80 CCC: Get tax benefits on premium paid up to Rs. 1,50,000/- towards pension policies. But, if you surrender the plan, the pension/annuity received will be taxed as per the existing tax laws.
- Section 80 D: The maximum tax benefits fetched under Section 80D are as follows:
- Tax benefit on premium paid up to 25,000 for yourself, your spouse, or your dependent children.
- There is an additional tax benefit on health insurance premiums paid up to 25,000 for covering parents.
Life insurance policies are your tool to receive death benefits and file for tax exemptions. The idea is that you save tax but at the same time build a safety net of wealth for the family. Life insurance policies protect your family during a time of financial crisis when you are not there to take care of them. If you are looking forward to knowing the best ways to save tax, consult your tax advisor or visit the link here.