As far as women are concerned, the most common reason for buying life insurance policies is saving tax. Like many other financial decisions, this too is both right and wrong. While the intent is correct, it is not advisable to buy a life cover merely to save tax. A life insurance policy should be bought primarily as a life cover, secondly as an investment, and lastly, as a tax-saving tool.
The range of insurance policies has increased manifold in recent years. From pure life cover to estate planning, there are plans to fulfill each need. Insurance should be the base of your financial pyramid; that it also helps you save tax is an added bonus. Life insurance offers tax benefits under two heads: deductions and exemptions. Deductions are based on the amount invested and are cut from the gross salary. Exemptions are availed of on the policy benefits that you get on maturity.
Under Section 80C of the Income Tax Act, you can invest up to Rs 1 lakh across certain products. Life insurers offer a wide choice between life covers and pension plans that help you optimise your tax liability within this limit. The premiums paid by you for a policy can be deducted from your income. This reduces your tax liability. Also, on surviving the policy tenure, the amount that you earn is exempt from tax, making these plans favourable among women.
There is more to gain, especially if you have added a health rider to your life insurance, or have taken a health insurance plan. Under Section 80D, the premiums paid up to Rs 15,000 a year are exempt from tax, reducing your tax liability further. In case you have elderly dependants, an additional Rs 20,000 is exempt if the health policy covers them as well.
The pension plans offered by insurers have long tenures, which instills discipline and thrift among investors. As you make regular contributions over a 15-20-year period, you benefit from the power of compounding and this adds significantly to your retirement corpus. Each year of contribution offers you a tax break, the big advantage coming at the time of vesting, when you decide to seek a monthly annuity from the corpus. While 40% of the corpus is exempt from tax on vesting, the remaining is structured into an annuity, which is treated as your income and taxed accordingly.
No wonder, the popularity of life insurance among Indian households is second only to bank deposits.
This article is sourced from Money Today for InvestmentYogi.