The end of the financial year is a busy time for taxpayers. As the deadline approaches, most people want to rejig their financial portfolio one last time to make the best out of tax-saving strategies. However, this last-minute shuffle shouldn’t be done without ample research and understanding of what you’re putting your money into.
While it’s common knowledge that insurance is a critical part of your investment portfolio, tax saving alone shouldn’t be the motive to invest in insurance. Simply allocating funds to a tax-saving investment plan is not the right approach. Financial planning also depends on your personal goals, age, risk appetite and other factors. So, before you buy insurance for tax saving, your decision must be aligned with your needs.
Here are a few popular financial instruments that you should know about and consider before making a decision:
Term Life Insurance
Exempt under Section 80C, term life insurance is usually the go-to option for most tax-payers. Term life insurance is the purest form of insurance and provides financial security to the dependents in the event of policyholder’s untimely death. Individuals can also claim tax deduction for premiums paid toward term life insurance up to Rs 1.5 lacs under Section 80C of The Income Tax Act. It acts as a safety net to save your family from financial burden especially in case you are the sole earning member, so it’s important to not look at it only from a tax-saving lens. It’s prudent to take a coverage of at least Rs 1 crore, keeping in view the rising expenses, outstanding liabilities and inflation rate. In fact, there are plans that even offer a return of premium at no extra cost making term insurance more value-driven and cost-effective.
Also Read: How to get your full salary in March with no additional tax burden
Health Insurance
Health insurance has a new-found meaning in a world riddled with high medical inflation. The exponential rate of medical expenses can potentially drain your savings and even push families into poverty. Health insurance now covers a range of expenses apart from hospitalization, like day-care procedures, ambulance, OPD, ICU etc. that otherwise can cost a fortune. One should have a coverage of at least Rs 50 lacs to 1 crore to adequately cover these expenses. Premium paid toward health insurance for self, spouse and children are eligible for tax deductions up to Rs 25,000 under Section 80D. You can also claim tax deduction for health insurance premiums paid for your parents. If your parents are aged below 60 years, you can claim a deduction of up to Rs 25,000 and if they are senior citizens, you can claim maximum deduction up to Rs 50,000, effectively taking the total deductions up to Rs 75,000.
Unit-Linked Insurance Plans (ULIPs)
Unit-linked insurance plans are a combination of investment and insurance plans. Individuals can invest in wide variety of funds like equity, debt, balanced funds that are market-linked. One can potentially gain a return of 12-15% if market conditions are favourable through the investment component of ULIPs. Investing in these funds depends on the risk appetite and long-term financial goals of an individual. The other component is life insurance that provides a financial safety net to your loved ones in your absence. ULIPs also provide waiver of premium option in which the insurer pays future premiums of the policy in the event of sudden demise of the policyholder.
You can claim tax benefit up to Rs 1.5 lacs in a financial year under Section 80C when investing in ULIPs. The maturity value of ULIPs is tax-free for premium amount up to Rs 2.5 lacs. Also, the death benefit provided to beneficiaries in ULIPs is tax-free under Section 10 (10D).
Guaranteed Return Plans
In today’s times when markets are uncertain, it makes a lot of sense to invest in financial instruments that offer guaranteed returns. Irrespective of the market conditions, guaranteed return plans keep your capital safe and provide assured returns. In these plans, the investor needs to invest a certain amount upfront for a specific period and the returns are guaranteed. New-age plans offer a return of up to 7-7.5% on your investments. These plans also come with a life insurance component making them eligible for tax benefits under Section 80C and 10 (10D).
Investing in these financial instruments will help reduce the tax liability by claiming deductions on the taxable income of investors. Nevertheless, it’s imperative to evaluate whether the features and advantages align with your individual objectives.
(By Tarun Mathur, Co-founder & Chief Business Officer – General Insurance, Policybazaar.com)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.