How do insurance policies help you save tax?
You must have heard that insurance is a passport to a better life. But what is an insurance policy? It is a corpus that you build for a rainy day. A life insurance policy covers your life. It gives a fund to your loved ones in your absence. A health plan covers your health. It helps you get the best possible treatment when you are unwell. Insurance also has another wonderful benefit. It allows you to save tax. So, if you are planning to invest your money to save tax, consider buying insurance policies.
Types of insurance policies
Many types of insurance policies are available in the market. These are motor insurance, home insurance, accident insurance, and travel insurance. But from a taxpayer’s point of view, health and life insurance policies are the ones to look out for. So, here is a detailed look at these insurance plans. Find out how they help you save tax.
Life insurance policies:
These policies promise to pay your nominee (usually the next of kin) a sum assured if you die prematurely. You have to pay a premium for that. This premium is tax deductible, you can deduct a maximum of Rs 1.5 lakh from your taxable income in the form of life insurance premiums. You do not have to pay any tax on that.
Health insurance policies:
Everyone must buy a good health insurance policy. Healthcare is very expensive nowadays. Without a good health plan, it may be difficult to afford a good hospital. But a health plan is also beneficial from a tax point of view. According to Section 80D of the Indian Income Tax Act 1961, premiums paid for health plans are tax deductible. You can claim a tax discount ranging between Rs. 25,000 and Rs. 65,000 depending on your age and policy type.
Insurance or investment—which one offers better tax benefits?
Consider the story of Rahul Atre from Pune. He inherited Rs 3 lakh from his late grandmother. He had recently gotten married and wasn’t sure if he should buy a health plan for himself and his wife or to invest the money. He knew the investment would fetch him a higher return and would help him in saving tax too. But marriage had made him responsible and he understood the gravity of insurance. His father then advised him to invest a part of his inheritance in a National Savings Certificate and buy a comprehensive health plan with the remaining money. This proved to be a wonderful suggestion as Rahul was able to invest, insure, and save tax too.
Insurance policies are good options if you want to save tax. But, are they the ideal tax-saving instruments? Or should you rather invest in mutual funds and ULIPs? To answer this question, you must first understand the purpose of insurance.
The chief aim of buying a health plan is to get a protective cover. Tax benefits are an added advantage. The government offers tax benefits on insurance to encourage people to stay insured.
So, you must not look at insurance primarily as a tax-saving tool. Look at it as a protection that also helps you save tax.
The bottom line
Now you know what insurance policies are and how they help you save tax. Go ahead get some smart insurance plans. Insure yourself and your loved ones. Trouble often comes unannounced. So, prepare for every misfortune that may befall you. Insurance policies can help you stay prepared in the best way possible. Do not look to save tax with your insurance policies as that is not the main aim of insurance. If you buy insurance, you will get cover and you will get to save tax too.