Tax benefits add a silver lining on insurance policies

Moneycontrol BureauLife insurance is must-have financial instrument in one’s portfolio especially if you have family members dependent on your income. Buying adequate life insurance provides financial safety for the family in the event of untimely death of the bread earner.However, while life insurance can be used as investment tool to generate returns along with protection, one major benefit of buying a life cover is the tax benefit that they provide.If you are a salaried person, investing in life insurance will allow you to enjoy tax benefits provided under Section 80C of the Income Tax Act. Thus, if you are purchasing an endowment plan or a Unit-linked Insurance Policy (Ulip) you can enjoy the triple benefit of insurance, investment gains and tax benefits.However, if you are buying a term plan, which is a pure insurance product that comes with lower premium rates, you will get similar tax benefits along with high insurance cover against the premium paid but will have to forego investment gains as investments in term policies do not fetch any returns.What are the various tax benefits in insurance?If you invest in a life insurance you can avail of two kinds of tax benefits. One is by way of availing a deduction from your taxable income and the other through gaining exemption from your total income.Section 80C and 80CC of the Income Tax Act lists out the investments for which deduction is allowed for an individual taxpayers or a Hindu Undivided Families (HUF). The deduction for purchase of life insurance can go right up to the maximum Rs 1,50,000 allowed under these sections.However, there is a slight technical catch. The existing laws provide that deduction can be availed if your premium paid is up to a maximum of 10 per cent of the total sum insured of the policy which is issued on or after April 1, 2012. For insurance policies that were issued prior to March 31, 2012, deduction is permitted on premium payment of up to maximum of 20 per cent of the sum insured. This, in effect means, if your premium payment exceeds 20 per cent of the sum assured, then you can claim deduction only up to 20 per cent of the sum assured.For pension plans floated by insurance companies, the tax treatment is slightly different. Under Section 80CCC you are allowed deduction for premium paid for a pension plan up to a maximum amount of Rs 100,000.As mentioned earlier, besides deduction, insurance also provide benefits of tax exemption under certain circumstances. Thus, the tax laws provide that any amount received through a life insurance policy is exempt from taxation. The money received could be maturity benefits from the policy you have been investing in or for a death claim. Thus, in the event of demise of the policyholder, the nominee who receives money as claims against the insurance policy will not have to pay tax on the amount received.How to view at tax benefits on insurance Section 80 C of the Income Tax Act specifies a large number of investment instruments over which the maximum permissible amount of Rs 1,50,000 tax deduction can be spread. Besides insurance, these include the likes of Public Provident Fund (PPF), Employees’ Provident Fund (EPF), Equity-Linked savings scheme (ELSS), National Savings Certificate (NSC) and fixed deposit of scheduled commercial banks.But an insurance investment comes with the additional benefit of protection. This does make insurance one of the most attractive investment option available under Section 80C bouquet. However, most investment experts would tell you that tax-saving on investment should be seen as a secondary benefit with protection being the central reason for purchase of an insurance policy.You must evaluate the insurance cover you need as replacement for income should anything unfortunate happen to you leaving your family without the monthly income flow. You must assess your income and the liabilities you have to arrive at the amount of insurance cover you require. The tax-savings made against that investment should come as an added bonus.