Life insurance is more than just a financial protection tool. It offers tax benefits as well. Further, the strategically planned combined usage with other tax saving instruments such as PPF, NPS and others offers the chance to maximise tax benefits. Insights into the tax-related information will contribute to informed and effective decision-making.
Life Insurance Tax Benefits
Life insurance offers policyholders and nominees with monetary benefits. Life insurance contributes to building the finances of the policyholder. It also offers support in situations of the policyholder’s untimely death by offering the accumulated funds to the family.
Apart from these essential benefits, life insurance policies also contribute to saving taxes. These can be obtained in two forms: tax deduction and tax exemption.
Tax deductions: They help save tax by deducting the amount from Gross Total Income (GTI). The tax deduction needs to be availed when filing income tax returns. Knowledge of different sections of the Income Tax Act of 1961 is essential to avail of this benefit.
Tax exemptions: These involve financial earnings that are naturally excluded from taxable income. The example includes tax-free death benefits received through life insurance.
Tax-Saving Instruments
Tax-saving instruments help taxpayers reduce their tax liability. They are effective investment options that contribute to financial planning and wealth creation. Additionally, investors can benefit from minimising the payable tax. The different tax-saving instruments and associated tax benefits include:
- Public Provident Fund (PPF) offers a maximum tax deduction of ₹1.5 lakh under Section 80C
- National Pension Scheme (NPS) offers a maximum tax deduction of ₹ 1.5 lakh under Section 80C, it also offers an extra deduction of ₹ 50,000 under Section 80CCD(1B)
- Equity Linked Saving Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs) offer a maximum tax deduction of ₹1.5 lakh under Section 80C
Combined Benefits From Life Insurance Policies and Other Investments
Tax saving is possible with other instruments in different phases of the life insurance policy. Here is how:
Entry Advantage: The taxpayers in the first phase are eligible to apply tax deductions under multiple sections of the Income Tax Act. The list includes 80C for life insurance premiums, 80CCC for pension plans, and 80CCE combines both. For instance, an ₹ 50,000 payment under a life insurance policy can be claimed for deduction. The taxpayer can still claim additional deductions under other Sections or tax-saving instruments.
Earnings Advantage: It is phase two, and here, the investment of policyholders will grow with time. These investments are tax-free, depending on the terms and conditions. However, these incomes are not open to premature withdrawal.
Exclusive Switching Advantage: This advantage can be availed in phase three when the investor switches between the investments. The transition across debt, equity or other funds does not require paying taxes.
Exit Advantage: This is the last phase and involves tax exemption for the amount received from the policy. The receiver is exempted from tax on the received amount under Section 10(10D) of the Income Tax Act, 1961. Also, do know the terms and conditions to obtain maximum advantage.
Income Tax Sections Offering Life Insurance Benefits
There are multiple sections of the Income Tax Act 1961 that offer tax benefits on Life Insurance policies. Strategically using these sections can help you derive maximum tax-efficient benefits while simultaneously opting for other tax-saving instruments. Learn those sections here:
Section 10(10D)
The section offers tax exemption on the payments received upon maturity of the life insurance policy. While the benefits hold valid for both maturity and death-based payouts, understanding the terms and conditions of this section is necessary.
Section 80C
The section benefits the individuals who have to pay premiums towards life insurance policies. It allows maximum dedication up to ₹ 1.5 lakhs per year.
Section 80CCC
This section provides benefits from tax deductions upon policy premiums paid towards pension or specified retirement plans. The deduction limit is ₹ 1.5 lakhs a year. It is important to note that surrendering the pension plan may lead to income tax applicability if deductions were previously claimed.
Section 80CCE
The Section 80CCE includes tax deductions under Sections 80C, 80CCC, and 80CCD(1), and the limit is ₹ 1.5 lakh per annum in total across these sections.
Section 80D
The section can be used to benefit from the premium payments done for health insurance plans. The taxpayers can also file for deductions if the policies are taken for children, parents and spouses. The deduction limit here is up to ₹ 25,000 per year, which can further be increased to ₹ 1,00,000. However, the latter is valid on the condition that the insured taxpayers and parents are above 60 years of age. The yearly expenditures on preventive healthcare can also be claimed for the deduction, with the limit being ₹ 5,000.
Decision-Making With Form 26AS
Form 26AS is the Tax Credit or Tax Deduction statement that offers detailed insights into the tax-related information linked with your Permanent Account Number (PAN) card. If you know how to calculate income tax and pay on the basis of self-assessment, Form 26AS will also act as a record. This Form 26AS provides the following detailed information that plays a key role in strategic planning for the finances:
- Tax deductions at source
- Tax collected source
- Advanced paid taxes
- Tax payments through self-assessment
- TDS defaults of the current year
- Income tax refunds received during the financial year
- Tax deductions on the sale of immovable property
- High-value transactions concerning mutual funds, dividends, shares and others
- Regular assessment of deposit tax
- Turnover information stated in GSTR-3B
Form 26AS can be used to derive an effective plan for minimising tax liability through verification of premium payments, tracking refunds and deductions and recognising the TDS on life insurance maturity proceeds.
Summing Up
The combined usage of life insurance with PPF or NPS offers both financial protection and retirement savings. The key strategies to leverage this include diversification and fund allocation. Gain information on different sections of the Income Tax Act and thoroughly understand the terms and conditions of life insurance policies and tax-saving instruments to obtain maximum benefits. Further, if you know how to calculate income tax, you can proceed with self-assessment based on your understanding. Otherwise, seeking expert help is a wise option.
FAQs on Form 26AS
1. How much time does it take to reflect TDS in Form 26AS?
Form 26AS is updated with TDS payments in 15 to 20 days after filing the quarterly returns.
2. What should be done in case of a mismatch between Form 16/16A and Form 26AS?
When errors between Form 26AS and Form 16/16A are found, the individual must inform the employer, who will file a revised TDS return.
3. Where to get the Form 26AS?
The TDS Reconciliation Analysis and Correction Enabling System (TRACES) provides form 26AS.
Leave a Reply