Things to note while buying life insurance for saving tax!

Insurance policies have traditionally been a very popular tax savings plans option considered by many people. Infact, many youngsters buy insurances blindly only to save taxes incurred on their incomes. However, this should not be the approach towards life insurance. These are magnificent products that not only give suitable cover for your dependents but also help in building your cool tax savings plan. Almost 70 percent of the overall insurance related products are sold in the quarter from January to March. While insurance plans do offer tax benefits up to Rs 1.5 lakh under section 80C of the Income Tax Act, new change in rules and regulations especially with the implementation of Direct Taxes Code (DTC) means one needs to be careful while selecting any insurance product simply because of its tax related benefits.

Tax Saving Plans

The article guides on some of the things to keep a note of while choosing life insurance premiums for tax savings plans.

Not All Insurances are Tax Free:

Many people fail to understand that not all insurance payments are tax free. People in their quest to save tax usually end up buying a lot of unwanted insurance products. Insurance agents usually donot tell about this and thus lot of mis-selling happens in insurance products. While premiums paid for life insurance policies are exempt from tax up to a maximum of Rs 1.5 lakh under Section 80C of the Income Tax Act; Section 80C encompasses investments from all the sources including life and health insurance premiums, investments in PPF and pension schemes to a ceiling of Rs 1 lakh per annum. For individuals paying premium more than Rs 1 lakh for multiple policies the apparent tax benefits may not be possible.

Change in Law

Introduction of the Direct Taxes Code (DTC) has laid down stiff conditions for deduction of premium from taxable income of the insurance policies. Under the new regulation, any insurance policy offering a life cover of less than 10 times the annual premium is not eligible for tax deduction. For example if the premium of an insurance policy of ULIP is Rs 50,000, then the policy must offer life cover of at least Rs 5 Lakh to get eligible for creating a tax savings plans.

Low IRR (Internal Rate of Return)

With the new DTC allowing insurance policies offering a cover of 10 times the annual premium to be eligible for tax rebate, the internal rate of return or IRR has also reduced substantially. For a cover of Rs 25 lakh, a user would need to spend a minimum of Rs 2.5 lakh a year. When we consider the IRR for a 10 year period, the average internal rate of return comes to 5.75 percent. So, one needs to consider his or her financial requirement at different life stages and choose the financial instrument accordingly.

Relief for Diseased or Disable people:

As per older DTC all insurance policies issued on or after April 1, 2012 must offer at least ten times the annual premium to be paid for getting eligible to create a tax savings plans on their insurance policies. However, exceptions are given to people who are suffering from diseases or ailment or those with disability as specified in the rules made under section 80DDB.