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Insurance saves tax, but be careful

If you are looking for the double benefit of getting insurance cover and tax saving with the same instrument then an insurance policy is the right option. It can ensure an income for the family eventually while helping you save on tax.

india Updated: Feb 08, 2011 01:10 IST
Sachin Kumar

If you are looking for the double benefit of getting insurance cover and tax saving with the same instrument then an insurance policy is the right option. It can ensure an income for the family eventually while helping you save on tax. But, be careful. Experts caution that the primary purpose of an insurance policy is risk cover and a policy should not be taken primarily to save tax. Also, do not forget to check the impact of the Direct Tax Code (DTC) on insurance products. The code is expected to come into effect from 1 April, 2012.

There is a rush to sell insurance policies in the January, February and March by those who want to link it big-time to saving tax. Experts say that reflects a wrong approach.

"Insurance products should be bought purely for the need of insurance cover one wants for one's family and should not be used as a tool of tax planning," says Veer Sardesai, chief executive Sardesai Finance. "Tax saving should be looked at as a bonus from policy and not as the major constituent," he adds.

Experts say one should take life cover for at least 10 times of his or her monthly income. Apart from this, the insurance amount should cover the equated monthly instalments of loans if the earning member is not there to take care of the family.http://www.hindustantimes.com/Images/HTEditImages/Images/08_02_11_buss25b.jpg

"One should go for term insurance plans rather than unit linked insurance plans or endowment plans as term plans provide a large cover at low premium," says Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

How much can you save
Under Section 80C of the Income Tax Act, one can claim tax benefits by way of deduction from taxable incomes of up to R100,000 by investing in insurance policy premia (including unit-linked insurance plans).

The proposed tax code will change the way you choose insurance products. One of the provisions of the DTC is that a policy will not be eligible for tax deduction if it offers a life cover of less than 20 times the annual premium. In such a case, the premium lose will tax benefits and on top of that, incomes accruing from the policy will be taxable. Also the tax break is proposed to be reduced from the current Rs100,000 a year to only Rs50,000 a year under the DTC.