Maximise Your Tax Savings With Life Insurance Premiums: A Guide To Section 80C

Taxes! Just the word can be stressful, right? After all, it feels like taxes are right there every time you earn something, ready to take a slice. But what if we tell you that life insurance can even help you reduce this tax liability?

You see, our tax system has been designed to reward mature decisions. Life insurance is one of those purchases. Thanks to Section 80C of the Income Tax Act, you can avail of tax deductions and benefits on your insurance premiums.  

Let’s explore some of the life insurance tax benefits you can avail of from your policy.

Life Tax Benefits Under Section 80C

Section 80C allows you to claim tax benefits on a variety of investment options. Upon successful investment, taxpayers can claim a maximum deduction of ₹1.5 Lakhs on their taxable income.^[1] 

So, if you have an income of ₹6 lakhs and paid ₹1.5 lakhs as life insurance premiums, you can deduct this amount from your total income, reducing your taxable income to ₹4.5 lakhs. 

Besides life insurance, the following investment options are also covered under section 80C :

• Equity Linked Savings Scheme
• Provident Funds
• Home loan payments
• National Savings Certificate (NSC)
• Sukanya Samriddhi Yojana
• Senior Citizen Savings Schemes (SCSS)

Eligibility Criteria For Tax Deductions

Before claiming tax deductions, check if you fulfil the eligibility criteria: 

• To avail of life insurance tax benefits, the insurance policies must be in the name of the taxpayer, their spouse, their parents or their children.
• For all life insurance policies issued from 1st April 2012, tax deductions for premiums up to 10% of the insured sum can be availed.
• For all life insurance policies issued before 1st April 2012, tax deductions can be availed for premiums up to 20% of the insured sum.
• For a person with any disability, tax deductions can be availed for premiums up to 15% of the insured sum.

To understand this limitation, let us take the example of Rajat, who purchased a policy in 2014.

Rajat’s life insurance policy had a coverage amount of ₹10 lakhs. According to the limitation, the annual insurance premium amount should only be 10% of the insured sum, hence, ₹1 lakh. 

If Rajat’s insurance policy assured a sum of ₹15 lakhs, then he would have been eligible to deduct the whole of  ₹1.5 lakhs from his taxable income. 

Other Tax Benefits Offered Under The Income Tax Act

Section 80C is not the only clause that offers life insurance tax benefits. Taxpayers can enjoy benefits under the following sections, too:

• Section 80CCC: Under this section, you can avail of a maximum tax deduction of ₹1.5 lakhs if you make contributions towards the payment of pension or annuity plans offered by a life insurance policy.^[2]
  
• Section 80D : Under this section, you can enjoy tax deductions of up to ₹25,000 to pay term plan insurance premiums with critical illness coverage.^[3]
  
• Section 10(10D) : Under this, the sum assured at maturity or policy surrender or as a death claim will be tax-free. However, if proceeds are more than ₹1 lakh, 1% TDS will be applied.^[4]
  
• Section 10(10A) : This section offers tax benefits for pension plans. If your pension plan provides a gratuity payment at maturity, 1/3rd of the amount will become tax-free. However, half of the maturity amount will become tax-free if no gratuity is offered.

Key Takeaways

Section 80C of the Income Tax Act has been designed to reward and push smart and responsible financial decisions. The government aims to boost positive financial decisions and improve our financial literacy by offering you tax benefits and deductions on these purchases.