Life and health insurance policies provide necessary coverage to safeguard one’s health and life. They also cover the health and financial needs of the beneficiaries after the policyholder’s death. Apart from these coverages, both insurance policies also offer tax benefits.
The Income Tax Act provides various provisions that allow taxpayers to claim deductions on premiums paid for these insurance policies. How many deductions can you avail yourself of each year and under which sections?
Keep reading to learn more about the tax benefits of health and life insurance policies and how to maximise them.
What are Health Insurance Tax Benefits?
Health insurance policies cover unforeseen medical expenses and offer substantial tax benefits under Section 80D of the Income Tax Act. Here are some of the key highlights:
- Deduction Limits
Health insurance policyholders can claim a deduction of up to ₹25,000 annually for premiums paid for themselves, their spouses, and dependent children. This deduction limits ₹50,000 for senior citizens over 60.
Moreover, individuals paying premiums for parents can claim an extra deduction of ₹25,000 (or ₹50,000 for senior citizens).
- Preventive Health Check-ups
Under Section 80D, taxpayers can also claim a deduction of up to ₹5,000 for expenses incurred on preventive health check-ups. This amount is included within the overall limits mentioned above.
- Eligible Policy Types
The deduction applies to health insurance policies, top-up plans, and critical illness policies.
Claiming these deductions can reduce an individual’s taxable income and tax liability. Thus, health insurance policies safeguard policyholders’ health and facilitate strategic financial planning through effective tax management.
What are the Limitations of Claiming Health Insurance Tax Benefits?
Claiming health insurance tax benefits has some limitations despite its multiple advantages. Here are some of them:
- Payment Method
Premiums paid through cash are not qualified for tax deductions under Section 80D.
- Age Restrictions
Only senior citizens above 60 years of age can claim the maximum deductions of up to ₹50,000. For other policyholders, the maximum deduction limit is ₹25,000, regardless of the number of dependents covered under the policy.
- Policy Ownership
Private limited companies or business firms cannot claim tax deductions under Section 80D against their health insurance policies. Only individuals and Hindu Undivided Families (HUFs) are eligible for these deductions.
- Group Insurance Policies
Premiums paid by employers for group health insurance policies of their employees do not qualify for tax deductions under Section 80D.
What are the Tax Benefits of Life Insurance Policies?
Life insurance policies offer financial security to the policyholder’s family in case of their demise. This insurance type also provides tax benefits under Sections 80C and 10(10D) of the Income Tax Act.
Here are some of the key features of tax deductions against term insurance policies:
- Section 80C
Under Section 80c of the Income Tax Act, policyholders can claim a deduction of up to ₹1.5 lakh every financial year against the life insurance premiums they pay. This includes various types of life insurance products, such as term plans, endowment plans, and Unit-Linked Insurance Plans (ULIPs).
- Exemption on Maturity Proceeds
Under Section 10(10D), maturity proceeds from life insurance policies are exempt from income tax (conditions apply). This includes death benefits and bonuses that a policyholder receives from the policy.
- Additional Deductions
Deductions can be claimed under Section 80ccc for pension plans and annuities, with similar limits as Section 80C.
What are the Limitations of Claiming Life Insurance Tax Benefits?
Apart from the tax benefits of life insurance policies, an insured must know about the limitations of tax deductions:
- Premium Payment Limits
If the total premium paid exceeds 10% of the sum assured for policies after 1st April 2012, the maturity proceeds may be taxable under Section 10(10D).
- Maximum Deduction Limits
Under Section 80C, the maximum deduction limit across all eligible investments is up to ₹1.5 lakh per annum. Thus, policyholders must consider their overall investment strategy within this threshold.
- Policy Ownership Requirements
Like health insurance tax benefits, only individual policyholders can claim deductions. Companies or firms cannot claim life insurance tax benefits under Sections 80C or 80CCC.
- Cash Payments Exclusion
Similar to health insurance, payments made in cash do not qualify for deductions under these sections.
- Exclusions on Certain Plans
Not all types of life insurance policies are eligible for tax benefits. So, you must verify eligibility based on specific plan details.
How to Maximise the Tax Benefits of Health and Life Insurance Plans?
Individuals can implement the following strategies to maximise tax benefits effectively through health and life insurance policies:
- Combine Policies
Bundling life and health insurance can increase the tax benefits as you can claim deductions under multiple sections of the Income Tax Act. So, you can avail a comprehensive coverage and claim maximum deductions.
- Opt for Family Floater Plans
Policyholders can buy family floater health insurance plans to cover multiple family members under a single premium. This helps maximise tax deductions while providing coverage for all dependents.
- Invest in Critical Illness Riders
Adding riders such as critical illness cover to your life insurance policy can provide additional protection and qualify you for tax benefits under Section 80D.
- Plan Premium Payments Wisely
Pay the premiums of your health and life insurance policies through non-cash modes like cheques or bank transfers. This makes you eligible for tax deductions.
- Consult Financial Advisors
Consult with financial advisors or tax professionals for personalised advice based on your financial situation. It will help you navigate complex regulations effectively.
- Review Policies Regularly
Review your health and life insurance policies regularly to ensure they meet your needs and provide optimal tax benefits based on your circumstances and requirements.
Maximising tax benefits through health and life insurance can enhance financial security while reducing taxable income in India. However, individuals should always know the intricate rules related to tax deductions. Doing so allows them to apply for the correct amount and gain tax benefits without any further hassles.