Insurance

What are the tax benefits of life insurance?

The primary purpose of life insurance is to provide financial protection to loved ones and securing their future. But a life insurance policy can also be an effective way of saving tax.

When you invest in life insurance, the government deducts the premium amount you pay towards insurance from your taxable amount.

When you invest in a term insurance, endowment or a retirement plan, the government deducts the premium amount you pay towards insurance from your taxable amount. And you end up saving tax on a maximum taxable income of Rs 1 lakh per year.

Listed below are a few tax exemptions provided to a life insurance investor:

  • Premiums paid for all life insurance policies are exempt from tax up to a maximum of Rs 1 lakh under Section 80C of the Income Tax Act, 1961. Also, the claim amount received by the beneficiaries or bonus in the hands of the policyholder is tax free under Section 10 (10D) of the Income Tax Act.
  • Investment in ULIPs—market-linked insurance policies that provide the combined benefits of insurance and investment—up to Rs 1 lakh are deductible from your taxable income.
  • For retirement plans, Section 80CCC of the Income Tax Act provides an exemption of up to a maximum of Rs 1 lakh for premiums paid towards pension plans.

However, please note that Section 80C encompasses investments from all the sources– life and health insurance premiums, investments in PPF, government bonds, etc.to a ceiling of Rs 1 lakh per annum. That means, even if you pay premiums worth Rs 1.5 lakh for multiple policies, the maximum rebate you can avail of is Rs 1 lakh.

But don’t lose heart. The basic objective of a life insurance policy is to provide protection. Tax saving is an icing on the cake.

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