Yet to plan tax saving? Invest in these insurance products for tax benefits and security

New Delhi: As the saying goes that early bird catches the worm, investment planning can be seen in the similar light. A good financial plan made well ahead of time not only promises brighter future returns but also cushions you in terms of taxation.

Vivek Jain, Head – Investments, Policybazaar.com in an exclusive chat with Reema Sharma of Zee News said, " After all, the primary purpose of investing is to maximize savings, be financially covered, especially during distressing times, and create wealth. And this is why, it’s best to make tax-saving decision searly rather than waiting till the last minute. One of the most sought-after options to save tax is investing in insurance products. Not only do they guarantee financial protection, but also offer great tax benefits. "

Jain further adds that it is essential to review your financial situation and evaluate your investments to see if you’ve taken the proper steps to lower your tax liability and also the way forward.

He highlights the following guide to tax savings with insurance-cum-investment products to reap higher returns.

ULIP (Section 80C and 10 (10D))

A very talked-about policy for a tax-free return is Unit Linked Investment Plans (ULIP) which provides a return of up to 12–15%. To elucidate the tax benefits, a policyholder may claim a tax deduction of up to Rs. 1,50,000 on the amount paid as policy premiums towards ULIPs under Sections 80C of the Income Tax Act. ULIP also offers tax benefits under Section 10(10D) for an annual premium of up to Rs 2.5 lakh. This benefit is quite unique to the product and doesn’t come with similar investing options, like mutual funds. The payout to the nominee in case of policyholder’s death is also tax-free.

Guaranteed Return Plans (Section 80C and 10 (10D))

The Guaranteed Return Plan is another policy that you should consider if you are looking at investing for tax benefits. Considered a worthy alternative compared to traditional plans such as PPF, FD and NSC, the guaranteed return plans provide a high return rate of 6 to 7.2% depending on terms and conditions. Moreover, it also comes with insurance benefits and a life cover 10 times the annual premium, which automatically entitles it to a tax rebate under Section 10(10)D. It likewise offers tax incentives under Section 80C up to Rs 1.5 lakh due to the life insurance component. 

Health Insurance (Section 80D)

A health insurance on the one hand covers medical expenses that arise due to an illness; while on the other, under Section 80D of the Income Tax Act of 1961, the policyholder can receive a tax exemption. It enables the policyholder to claim a tax rebate of up to Rs 25,000 per financial year for self, spouse, and dependent children. The insured can also claim an additional deduction of Rs 25,000 against medical insurance premiums paid for parents who are not senior citizens and Rs 50,000 if one or both parents are senior citizens. This makes it a nearly saving of Rs. 75,000 in tax deductions when buying a health insurance policy for self and for parents, as per terms and conditions.

Term Insurance (Section 80C and 10 (10D))

This has to be quite a common investment for tax-saving. Premiums paid towards one’s term life plan are eligible for tax benefits up to Rs 1.5 lakhs under Section 80C of the Income Tax Act. Not just this, the benefits also extend to Section 10 (10D) wherein the payout received under this plan in case of the death of the policyholder is also completely tax-free. Term insurance, as the name suggests, is a pure life insurance policy that financially safeguards the policyholder’s family. The plan acts as a financial security tool in the event of the policyholder's untimely demise. Thus, a term insurance policy provides a financial cushion while also aiding one’s tax savings.

Jain reiterates that people should choose from any of the above or purchase a mix of policies based on their existing financial portfolio, as all offer tax benefits that result in increased wealth creation. However, it is also important to read the fine print of the various policies before taking the final decision, he adds.