Maximum tax-savings are the result of efficient tax planning done during a financial year. It is about investing in suitable instruments that make you eligible for tax deductions. A term plan is one such instrument with which you can save more money while filing taxes. It is a significant part of investment portfolio maintained by almost every investor.
You might only know about term plans for the fundamental death benefits they offer. But they also provide opportunities to save taxes under multiple sections of the IT Act, 1961. Check how an income tax calculator works to save taxes on buying a suitable term plan.
Let’s explore different sections under which you can save taxes with term insurance.
This section covers the basic tax benefits of term insurance that you, as an Indian taxpayer, can avail of. It is a widely known tax rule which says that life insurance premiums paid in a financial year are tax-deductible. The maximum tax amount you can save under this rule is limited to one and a half lakh rupees, including your investments in other tax-saving instruments. Most income tax calculators have this section covered under their calculation principles.
You can save a considerable amount by buying a term plan with adequate life cover for your family. The higher the premium of such a plan, the more will be your tax savings.
Section 10 (10D)
Other than the tax deductions you can avail of with term insurance purchase, there are tax-exemptions. While many individuals use deductions and exemptions interchangeably, they are different from each other.
Income tax exemption means you do not have to pay any tax on the income from a particular source. For term insurance, the nominee has the death benefit as an income source. This income is tax-exempt under Section 10 (10D). Similarly, the maturity benefit under certain term plans is tax-exempt.
On the other hand, deductions refer to the amount you can save post investing money in specific instruments. They are covered under 80C, as detailed above. You can use an income tax calculator that includes both these sections to determine tax-savings.
This section of the Income Tax Act covers the tax deductions you can avail of on paying health insurance premiums. You might be wondering why it is covered with tax benefits under a term plan here. It is because many term insurance plans come with health cover as well.
You can easily find term plans with which you can also get critical illness insurance coverage through additional riders. Such plans offer dual benefits of both life and health insurance. The health insurance portion of these plans can increase your income-tax savings under section 80D.
The tax-saving limits under this section are based on the age of the insured individual. You can also save tax under 80D by buying health insurance for your kids, spouse, and parents.
Two Factors That Determine Term Insurance Tax Benefits
- Premium You Pay for a Specific Life Cover
Take the case of a term plan bought by a 30-year-old male individual with a life cover of Rs. 50 Lakhs. The approximate premium for a policy period of 40 years would be around Rs. 7,000 per year. If you look at the maximum capping under section 80C, this premium makes up a small part of it. Switch to the life cover of Rs. 1 crore, and the premiums go around Rs. 13,000 per year.
It simply means you can maximize tax savings with a term plan when you select a considerable life cover. You can enter these premiums into an income tax calculator along with other information to see the total tax amount you can save.
- Added Critical Illness Coverage
As covered above, protection against critical illnesses also helps increase your tax savings with a term plan. As an example, a critical illness coverage of Rs. 10 Lakhs costs around Rs. 8,000. This amount, when added to the total term plan premium, will increase the net premium payable. However, the health cover will be treated separately under Section 80D.
As a whole, the higher the total premium you pay for an all-inclusive term plan, the more tax amount you can save under different sections.
Save Tax Beyond Term Insurance
Term insurance is not the only instrument that can help you save tax. Beyond getting life insurance coverage, you can also invest in other instruments covered under Section 80C. These include Public Provident Fund, National Pension Scheme, National Savings Certificate, ELSS funds, and tax-saving FDs. Each of these financial instruments offers a specific return and have a distinct lock-in period.
By entering the details of all your investment in a tax calculator, you can sum up the tax savings online. You can also look beyond 80C and invest in different options to save more tax. It would be best if you begin tax planning at the start of a financial year. In case you find it difficult to use an income tax calculator online, seek advice from a tax professional.