INSURANCE holds a special place in the world of investments. A major reason to buy an insurance policy in the olden days was to avail tax benefits. For many, insurance was a synonym for tax saving. Now the scenario has been changing.

Today, there are a variety of insurance plans that help people save tax while ensuring wealth creation and providing extended protection – either in the form of life cover or health cover or regular income. The plans include life insurance, health insurance, term insurance, ULIP scheme, and pension plan. Let’s examine their features:

(1) Life Insurance

Life insurance offers a safety net in life. If any untoward incident happens, it takes care of your near and dear. Your premium payments are exempted from tax. Under Section 80C of the Income Tax Act, you can claim a deduction of up to Rs 1.5 lakh on premium paid in a financial year. Further, under Section 10(10D), the maturity amount or the benefits due to accident/ permanent disability or death are tax-free. In addition to tax saving, the policy promises long-term financial gains and extended life cover even after the policy attains maturity.

(2) ULIP

The Unit-Linked Insurance Plan (ULIP) is a combination of insurance and investment. It provides you insurance cover and channelize your investments into market-linked instruments for better returns. ULIP is treated as insurance for taxation purpose and investors can claim tax deduction of up to Rs 1.5 lakh in a fiscal year on premium payments. However, the Long-term Capital Gains Tax is applicable on ULIP at the time of maturity. For policies taken after February 2021, the maturity benefits are tax-free if the annual premium payment is less than Rs 2.5 lakh. Moreover, it should not exceed 10% of the sum assured. The death benefits from ULIP are completely tax free.

(3) Health insurance

Under section 80D, premiums paid on health/ medical insurance policies qualify for a tax deduction of up to Rs 25, 000 in a financial year. For senior citizens, the deduction limit is up to Rs 50,000 a year. That is, if you choose a health insurance policy for your family, including parents (aged below 60 years), you can claim tax deductions up to Rs 50,000. If your parents are aged above 60 years, deduction can be up to Rs 75,000. More deductions are allowed if your age crosses 60 or any of your family members has permanent disability or serious illness.

(4) Term life insurance

Term life insurance also enjoys tax benefits under Sections 80C, 10(10D) and 80D. Under Section 80C, deductions of up to Rs 1.5 lakh can be claimed on premium payments. Section 10(10D) exempts tax liability on the insurance amount in the event of insurer’s death. Section 80D allows policy holder to claim tax exemption on premiums paid on health riders attached to the term insurance, such as critical illness cover and in-patient treatment cover, up to Rs 25,000.

(5) Pension Plan

The objective of a pension scheme is to provide a safe and secure retirement life. It helps you draw steady and stable income even after retiring from regular employment. The premiums paid for pension plans enjoy tax exemptions up to Rs 1.5 lakh in a year, under Section 80CCC of the Income Tax Act.

Sections 80CCC and 80CCD allow deductions on investments made in pension schemes. Total deductions permitted under all these sections –Sections 80C, 80CCC and 80CCD(1) – are capped at Rs 1.5 lakh. However, National Pension Scheme (NPS) qualifies for an additional deduction of Rs 50,000 under Section 80CCD(1B).