‘How to save tax’ is a common question that arises when doing financial planning. It may have a dual purpose if done correctly: it can help people reach their financial objectives while also saving them money on taxes. Most people are unaware that there are several sorts of tax-saving investments available in the market. Furthermore, with growing medical expenditures, everyone needs adequate insurance or medical coverage. Other than tax-saving insurance policies, this dual advantage is uncommon among tax-saving products.
Here are some basics to help you better comprehend how tax-advantaged insurance plans function. This should help you invest sensibly and save on the dreaded tax that is levied on your pay at the conclusion of each fiscal year.
When you buy life insurance, you agree to pay the premium. The premium paid for every life insurance policy purchased majorly qualifies for deduction under Section 80C. Only the insured is eligible for a tax deduction for insurance premiums paid in a given fiscal year. The tax break under Section 80C is limited to a maximum of Rs.1, 50, 000. Yet, the minimum holding time for a tax-saving insurance policy is two years.
According to the Income Tax Act of 1961, Section 80D allows the investor to claim a tax deduction for the acquisition of a medical insurance plan. More information is available on the income tax government of India's site.
Furthermore, critical illness insurance policies, as component of health insurance, cover serious and long-term diseases that necessitate costly medical care. Most health insurance policies include critical illness rider coverage for an extra premium, which assists the insured in covering excessive hospitalisation and treatment costs. As a Critical Illness Insurance protects the insured from life-threatening serious illnesses such as cancer, cardiac arrest, renal failure, and so on, the plan offers a lump sum amount of coverage that can protect absurdly high medical costs for serious diseases covered by the insurance policy.
Now that we've covered the fundamentals of a tax-saving insurance plan, such as life insurance coverage and Mediclaim insurance plans, let's go a little further. This will assist you as an investor in determining the sort of insurance you wish to buy for yourself and your spouse or kids.
Furthermore, the key insurance options that can help get assured savings for the future are as follows:
Life Insurance
Life insurance is an essential component of every person's financial portfolio. It provides financial security to the individual's family while he is away. As a result, the breadwinner should seek to obtain life insurance as soon as possible for the sake of the family's stability. Endowment policies, whole life policies, term policies, money-back policies, and ULIPs were the most common types of life insurance policies.
Most insurance policies are 'equivalent' under the law in terms of tax savings. Therefore, irrespective of the life insurance policy, tax savings are guaranteed. The insurance premiums on such insurance are tax-deductible, making them among the most significant tax-saving plans to choose.
Pension plans
Another type of life insurance is pension or retirement plans, which have a distinct goal. While insurance coverage is intended to safeguard a person's loved ones in the event of his demise, a pension scheme is intended to support the person and his dependents if he is not dead.
The pension procedure is divided into two stages. They are accumulation and withdrawal. During the accumulation stage, the person saves money during his working period. The withdrawal phase begins when you retire. Tax breaks are only available during the accumulation period. On maturation, one-third of the cumulative sum is tax-free, while the remaining two-thirds is recognized as earnings and taxed at the marginal income tax rate. When the recipient dies, the cash is tax-free.
Health insurance or Mediclaim
As it is more often known, Health insurance or Mediclaim or critical illness/health plans pays for expenditures incurred as a result of an accident or hospitalization. Pre- and post-hospitalization expenditures are also covered by Mediclaim, subject to the sum promised.
Individuals can benefit from health insurance tax-free. Insurance premiums of up to Rs 20, 000 for elderly persons and Rs 15, 000 for others are tax-deductible, making it an effective tax-saving investment. If a person pays Rs 15, 000 for his personal coverage and Rs 20, 000 for his elderly parent, he can claim a tax advantage of Rs 35, 000. Section 80D makes individual policyholders, HUFs, NRIs, and foreign residents qualify for health insurance premium payments tax breaks.
Payment for health insurance policies, Central Government Health Scheme (CGHS), Health checkup costs, Health insurance premiums can be paid by the insured, wife, child, or even elderly parents. Yet, any sort of accident coverage does not qualify for a tax break. Mediclaim plans and critical sickness coverage are examples of what might be eligible for a tax break.
Unit Linked Insurance Plan (ULIP)
ULIPs are now common as they provide both life insurance with investment advantages. ULIP plans include a 5-year lock-in period and a basic premium sum that varies but often starts as little as Rs. 5, 000. Under certain circumstances, payouts below a ULIP, particularly death benefits and partial withdrawals from the plan, are free from taxes under Section 10(10D) of the Income Tax Act.
Like other life insurance policies, the sum invested in a ULIP is tax-deductible. This stems from the income tax rule that allows a deduction for "any money paid to retain in effect" a life insurance policy. You can even include any additional fees paid to the insurance, such as service tax. Sections 80C and 80CCC of the Indian IT Act are the two important provisions that apply here. Under these clauses, a deduction of up to Rs. 1, 50, 000* is permitted in a fiscal year under sections 80C and 80CCC. This implies that, while you can invest more, the total possible deduction is restricted at Rs. 1, 50, 000* each year.
Public Provident Fund (PPF)
PPF is an investment alternative that offers tax breaks under Section 80C of the Income Tax Act of 1961 in exchange for a basic premium of ₹500. PPF investments have a 15-year lock-in term, and the rate of interest is set for the duration of the fund but is evaluated by the government quarterly. PPF investments are classified as Exempt-Exempt-Exempt (EEE), which implies that the interest and maturity value are tax-free in addition to the investment.
Bottom Line
There are various ways for you to reduce taxes in India. Yet, your investment plan must include the tax advantage component, as well as particular financial goals that you intend to achieve. Only rigorous preparation and study can assist you in generating and retaining money in the long run. Consult a proven insurance firm such as Aditya Birla insurance for tips and pieces of advice on numerous investment alternatives that can also help assure your family's long-term financial needs.