We are well into the New Year and this is the month where financial planning assumes significant importance. Whether for tax planning or financial resolutions – this is just the right time to set the sails. After all, the beginning of the calendar year also takes you one step closer to the end of the financial year.
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This is the time when you must reflect on your financial journey and make those fine adjustments that are needed. Maybe you stuck to the financial plan you set for yourself last year and all you need is the last phases of execution. Or maybe, like many New Year resolutions, your financial plans also faltered and you need to do some last-minute decision-making to achieve your tax goals.
In any case, this review of your finances helps you understand where you stand financially. Insurance is a significant part of tax planning, so here is a guide to achieving tax efficiency with insurance products.
Calculating your tax liabilityThe very first step in this journey is to calculate your total taxable income which then helps you arrive at your total tax liability for the current financial year. You can use one of the several online calculators to achieve this.
However, that is not all. You can substantially decrease your tax outgo using the several provisions provided by the government under the Income Tax Act, 1961.So the next step is to figure out if you have fully utilised those tax deductions optimally.
And if there is still room to further bring down your tax liability, then you can make use of the multiple insurance products which come with ample tax benefits. And to put the cherry on top, they help secure your future while saving you money in taxes.
Which insurance products to consider?Term Life Insurance: This is the most fundamental life insurance product that offers purely a life insurance solution with no investment component. Basically, you pay the insurance premium on a regular basis and in return, you get a life cover. These plans offer a high coverage at a reasonable premium.
So in the event of the untimely demise of the policyholder, this cover protects his/her family by offering a lump sum amount which they can use to carry on with their lives.
Apart from the insurance coverage that supports the family members, term plans have tax benefits as well. All premium payments get a tax deduction under Section 80C of the Income Tax Act 1961, up to a limit of Rs 1.5 lakh.Also, the settlement received by the policyholder’s family in case of his/her death is completely exempt from tax.
Many new-age plans these days also come with the return-of-premium benefit wherein the policyholder receives the entire premium paid excluding GST if he/she survives the policy term.Insurance-cum-investment plans: Whether they are market-linked or guaranteed, all insurance-cum-investment plans offer returns as well as life cover and subsequent tax benefits under the Rs 1.5 lakh deduction limit of Section 80C.For instance, by opting for ULIPs, you secure your family’s future while also building a huge corpus over time by making use of the equity and debt funds.
The maturity amount is also exempt from tax if the annual premium is not above Rs 2.5 lakh. If you have a no-risk approach to investments, you can opt for guaranteed plans and lock your returns at the time of purchase. You can claim tax deductions for annual premiums up to Rs 5 lakh in these plans. In case of the policyholder’s demise, the insurance proceeds are also tax-free.
Health Insurance: Like life insurance, a health insurance policy is also crucial to safeguard your finances from the pitfalls of medical bills. Health plans too come with tax benefits, albeit under a different section – Section 80D. That’s good news for policyholders because it helps you get tax benefits beyond the Rs 1.5 lakh Section 80C limit. You can get a deduction of up to Rs 25,000 for a health plan for yourself, your spouse and your children.
You can also claim separate deductions up to Rs 50,000 for premiums paid for your parents if they are above 60 years old, or Rs 25,000 if they are younger. This brings the total possible deductions for health insurance to Rs 75,000.With a combination of all these plans, one can achieve tax efficiency and minimise tax liability.
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Remember though that investing in these tax-saving insurance products provides you advantages beyond just saving income tax. They provide you with financial security and peace of mind.
