Do you know that insurance policies are the most favorite income tax saving products. Almost 70% of insurance policies are sold every year from January-March in the name of income tax saving. This is one of the sad part of financial planning in our country as most people don’t understand the real benefit of insurance policy. Anyway we will discuss on people’s intention later. First let’s discuss how one can save income tax buying insurance policies. With the increase of 80C limit to 1.5 lakh it is expected that insurance policy sale is going to rise this year. If you are also planning to save income tax by buying an insurance policy then check out the things to remember.
How buying Insurance Policy can save income tax?
Lot of things has changed in last few years. So one have to remember those things before buying any insurance policy to save income tax.
Don’t Miss How to choose the best term insurance plan?
- The very first point is the policy cover should be minimum 10 times higher than the premium paid. Means if your yearly premium is 50,000 then your life cover should not less than 5 lakh. In other words if you want to buy a life cover of 50 lakh, then you have to pay yearly 5 lakh premium. Wow!! Can anyone pay such premium? In such a scenario I would suggest to buy a pure term insurance plan and pay much lesser premium. You can easily get income tax benefit on that premium paid although that might be very less to consume 80C.
- If your policy gets matured than you can get income tax benefit under section 10(10D).
- You can buy insurance policy for your wife, kids and enjoy tax benefit under 80C.
- One can enjoy more tax benefit under section 80DD by buying a health insurance plan. A maximum deduction of Rs 15,000 for your direct family and extra 15,000 for your parents. In case parents are senior citizens you can go further 20,000. So total 35,000 one can declare to get income tax benefit.
- If you invest in a pension plan then under section 80CCC you can avail maximum 1 lakh income tax benefit on the premium paid for pension plans. On maturity one third of the accumulated amount will be tax free and rest amount will be paid as regular monthly pension.
Should I buy an insurance policy to save income tax?
First thing one should understand is why we are investing for the sake of saving income tax? Paying income tax is a mandatory task that we can’t ignore. So without doing any calculation if you invest your money in such a product which will stop the growth? Then there is no point to invest and save income tax. To save Rs 10,000 income tax one have to invest Rs 1 lakh (considering 10% income tax slab). Why to sacrifice 1 lakh to save 10,000? Instead pay 10,000 as income tax and keep 90,000 in a best savings scheme for a better long term return.
My intention is clear here; buy an insurance policy for the sake of life cover only. Don’t compare a life insurance plan with an investment product. All the endowment and ULIP plans which offer life cover with return hardly able to perform in few years. Those plan offer very less life cover and hardly 3-4% max investment return. That’s why many people realize the facts and started surrendering these policies in the initial years only. Just think about the money you lost between buying and surrendering the policy. This is much higher than the income tax that would pay by not buying this policy.
So what do you think about my points? Do you really support insurance companies selling policies in the name income tax saving? I would love to know your views here.