Tax Saving Benefit: How Life Insurance Can Help You Save

People invest in Life Insurance to financially secure their family, in case of unfortunate circumstances of them not being there. However, this investment also provides Life Insurance tax benefits. You can enjoy plenty of tax benefits if you strategize your investments and choose the right Life Insurance, sum assured, and premium amount. This blog explains how policyholders can reduce tax liabilities and optimize returns using the right tax-saving strategies. 

What is Life Insurance and How Does it Work?

Before we get into the details of Life Insurance tax benefits, let’s start by understanding what Life Insurance is and how it works. If you’re beginning your investment journey, start by choosing the right Life Insurance Plan. This plan takes care of your family’s financial future in case of your death. 

You pay premiums for a specific period determined in the policy, and in return, the insurer releases the accumulated funds in the form of maturity or death proceeds. Many people include Life Insurance in financial planning because it provides dual tax savings and financial security benefits. At Shriram Life Insurance, we provide a wide range of savings plans and protection plans that feature insurance coverage paired with other benefits.

What are the Life Insurance Tax Benefits?

All Life Insurance policies in India enable policyholders to save taxes by deducting the amount paid towards premiums in their income tax returns. These tax deductible premiums help lower tax liability for a particular financial year while accumulating Life Insurance coverage benefits for their family. 

If you want to do strategic tax planning with Life Insurance, always remember that tax benefits are available in two forms: Tax deductions and tax exemptions.

Tax deductions refer to the amount you can deduct from your Gross Total Income (GTI) while filing the income tax return. It can significantly reduce the amount of tax payable. Tax deductible premiums can be claimed under different sections of the Income Tax, 1961, which are covered later in this article.

Tax exemptions are another important aspect of tax benefits. Tax exemptions refer to the part of your insurance earnings or proceeds that are naturally exempted from tax. For instance, tax-free death benefits come under tax exemption, not deduction.     

How to Save Income Tax with a Life Insurance Policy?

The multiple features of Life Insurance for saving are frequently discussed among working individuals, but its tax benefits aren’t talked about enough. If you have an insurance policy or are planning to buy one, you can enjoy tax savings at the following stages:

• Entry Advantage

At this stage, you can deduct the amount paid towards the policy’s premium under relevant sections for tax savings. For example, if you have paid ₹ 50,000 as a Life Insurance premium in one financial year, you can claim the whole amount as deduction u/s 80C. It is among the most common tax-saving techniques for salaried employees and self-employed individuals. Tax savings through section 80C are for Life Insurance, 80D is for health insurance, and 80CCC is for pension plans. We will discuss these sections in detail later in this article. 

• Earnings Advantage

Since most Life Insurance policies have a long-term tenure, your investment keeps growing because of the power of compounding. The best part is the earnings during this stage are non-taxable, provided you don’t withdraw them prematurely. If you invest in our unit-linked retirement plans or child plans, you can enjoy growth over a period without worrying about paying taxes on the earned amount. 

• Exclusive Switching Advantage

You can enjoy tax-free switching if you want to switch between your investments in unit-linked insurance plans. 

• Exit Advantage

It is the last stage of your policy, where you begin to receive payouts or proceeds from the insurer. Most proceeds are exempted from tax u/s 10 (10D), subject to certain conditions. You can get detailed information about 10(10D) tax benefits in the following section.

Tax Benefits on Life Insurance Policies Under Different Sections of the Income Tax Act, 1961

You can get Life Insurance tax benefits under different yet relevant sections of the Income Tax Act, 1961. Most deductions fall under the following sections:

• Section 80C

Policyholders can claim a deduction for the amount paid towards insurance premium u/s 80C, up to a maximum limit of ₹ 1.50 lakh per annum. The Tax Benefit of 80C can be availed if the premium exceeds 10% of the policy’s sum assured amount, then tax will be levied proportionally. If you invest in our Shriram Life Early Cash Plan, you can enjoy tax-deductible premiums u/s 80C. This plan provides life coverage with added benefits such as a cash bonus guarantee, wealth creation through compounding, capital guarantee, and more. 

• Section 80D

Policyholders who have invested in health insurance plans can claim the premium payment amount as a deduction u/s 80D. The deduction is capped at ₹25,000 per annum, but you can claim an additional ₹25,000 per annum if you’ve taken a policy for your parents. You can claim ₹50,000 per annum as a deduction if your parents are senior citizens.

• Section 10(10D)

This section ensures that the proceeds received by nominees in case of the policyholder’s death are fully exempt from tax. Any attached incentives or surrendering value is also exempted from tax. 

• Section 80CCC

You can claim deductions toward the premium paid for designated pension plans. The deductions are capped at a combined limit of ₹1.50 lakh per annum u/s 80C and 80CCD(1). If you surrender the policy prematurely, then the amount received on surrendering will be taxable as regular income. 

• Section 10 (10A)

The accumulated (commuted) pension amount received by government employees are exempted from tax u/s 10(10A). However, an uncommuted or monthly pension is taxable as a regular salary.

• Section 80CCE

This section limits the total eligible deduction amount to ₹1.50 lakh per annum for multiple policyholders. The limit includes combined total deductions u/s section 80C, 80CCC, and 80CCD(1). 

What are the Potential Tax Benefits on Riders of Life Insurance?

Riders are great tools to enhance the coverage of a standard Life Insurance policy, but they also contribute to tax savings. According to Section 80D, if you buy a term insurance plan with health-related riders like hospital care rider, critical illness, surgical care, etc., you can get a deduction of up to ₹25,000. You can get an additional ₹25,000 deduction limit on similar plans purchased for parents. 

This limit is further increased to ₹50,000 if you’re buying policies for parents aged 60+/senior citizens. Hence, always evaluate different tax saving strategies before investing in any plan. You must explore our Shriram Life Premier Assured Benefit Plan if you want to buy a Life Insurance that provides higher returns for higher premiums and also helps you save tax on riders. It is one of our best savings plans that also provide life coverage and various other benefits.  

What is TDS on Life Insurance Policy?

Tax Deducted at Source (TDS) is generally charged on eligible financial products, including insurance plans, potentially lowering the maturity proceeds. If you receive payouts of more than ₹1,00,000 upon policy maturity, then the insurer will deduct a 5% TDS before releasing the funds. No TDS on Life Insurance will be deducted if the amount is lower than ₹1,00,000.

Additionally, no TDS will be deducted if the plan falls u/s 10(10D), premium payment doesn’t exceed 10% of the sum assured value (for policies purchased after 1st April 2021), or the amount is received u/s 80DD(3) or 80DDA(3). If you purchased the plan between 1st April 2003 and 31st March 2012, then TDS on Life Insurance won’t be deducted if the premium payments don’t exceed 20% of the policy’s total sum assured.  

What is GST on Life Insurance Policy?

Goods and Services Tax, a.k.a. GST, is an indirect tax imposed on certain goods and services. Policyholders pay a flat 18% GST on all insurance policy premiums. Previously, policyholders paid a 15% service tax, including the Krishi Kalyan cess and Swachh Bharat cess. It has not been replaced by GST.  

Eligibility Criteria to Claim Life Insurance Tax Benefits

Life Insurance tax benefits are available to all individuals and Hindu Undivided Families (HUFs). They can claim tax benefits on premium payments and maturity proceeds under relevant sections of the Income Tax Act, 1961. 

Tax Benefits for Single Premium Insurance Policies

Single premium insurance policies are also eligible for tax deductions u/s 80C. The premium paid on these policies can be claimed as a deduction u/s 80C. The only difference between single premium and multiple premium policies is that the former only gets one tax deduction in the payment year, whereas the policyholder can enjoy deductions on multiple premium payments every year. As discussed above, the maturity proceeds are taxed as any other insurance policy.

Advantages and Tax Implications of Exiting a Life Insurance Policy

The biggest advantage of exiting a Life Insurance policy is getting instant funds to meet unexpected, immediate expenses. The tax implications will depend on the policy type, amount, number of premiums paid to date, how long you held the policy, and various other factors. 
For example, if you surrender an endowment insurance plan, you only enjoy tax benefits if you’ve paid the premiums for the first two years. In the case of ULIP, tax benefits will only apply if you surrender the policy after five years. So, always check the type of policy you have to determine the relevant tax implications.  

Conclusion

Life Insurance is a must-have investment for every individual because it ensures the policyholder’s financial future is secured and stable. While these plans are primarily designed for financial security, they also provide tax benefits to all policyholders. You can use the information discussed in this article to plan effective tax savings strategies for optimal benefits. You can also invest in Shriram Life Insurance plans to enjoy dual benefits of life cover and tax benefits.

If you want to build wealth over time while maintaining secure life coverage, then you must explore our Shriram Life Assured Income Plan. It provides numerous benefits like flexible premiums, additional protection, assured income, etc., in addition to tax savings. We have various plans designed for protection, savings, retirement, etc., so explore all and invest in the ones that seamlessly align with your financial goals.