Insuring youself against Income Tax is easy
Caution has to be exercised while choosing a plan, for some of the policies do not offer tax advantageUpdated: Apr 10, 2006 12:02 IST
WANT TO insure against income tax? Take a policy.
Taking charge of self-needs has in any case become a compulsion in today's world, more so in India where Government is busy handling more important tasks like poverty, primary education and drinking water to all. Tax benefits on life saving (insurance) schemes makes the sufferings bearable when one goes shopping for life or medical cover.
Insurance offers multiple benefits: cover against risks, returns on investment and tax relief. Under watchful eyes of IRDA (insurance regulatory Development Authority, Insurance companies offer safety, innovative investment options and, most importantly, peace of mind.
Tax incentives play a vital role in promoting any financial product. The insurance sector too has received many tax incentives to promote the concept of insurance among masses. Both insured and insurer are insured against tax. Insured gets deduction of premium paid from taxable income while there is no tax on amount received at maturity. Insurance companies also don't have to pay tax on the income earned on insurance funds.
Premium up to Rs 1 lakh per annum on life insurance policies taken in the name of oneself, spouse or children is allowed as deduction from taxable income under section 80 C of Income Tax Act. For every Rs1 lakh paid by you as premium, government forgoes tax you were supposed to pay. Higher the tax slab to which you belong, higher the loss to exchequer.
Caution has to be exercised while choosing a plan, for some of the policies do not offer tax advantage. For instance, there is no tax exemption on an insurance policy issued on or after 1 April 2003, in respect of which the premium payable for any of the years during the term of the policy exceeds 20 per cent of the sum assured. Annuities or pension received under various schemes of LIC, where the motive is to provide return on investment or annuity for life, are also subject to tax. Any amount received on the maturity of such pension scheme as a commuted value in lump sum is exempt from tax but the pension received by the scheme holder is taxable.
On other policies, any amount including bonus received from insurance companies on death, maturity or otherwise is exempt from income tax under section 10(10D) of Incometax Act.
Health or medical insurance though do not qualify as investments, yet a deduction up to Rs 10,000 for any sum paid as premium on the health of family members from taxable income is an added advantage. The above limit of Rs 10,000 stands increased to Rs 15,000 in case the medical premium has been paid to effect or keep in force insurance in relation to a senior citizen.
A resident individual or HUF is allowed a deduction of Rs 50,000 if he incurs any expenditure for the medical treatment of a dependent person with disability or pays or deposits any amount under a scheme framed by LIC in respect of such person. If such dependant is a person with severe disability the deduction will become Rs 75,000.
To sum-up, it is sensible to pool-in reasonable money for your insurance where a sizable portion is contributed by the government by way of forgoing taxes.
First Published: Apr 10, 2006 12:02 IST