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Home Articles Health Insurance Tax Benefit

Health Insurance Tax Benefit

IndianMoney.com Research Team | Updated On Friday, December 04,2009, 07:23 PM

Health Insurance Tax Benefit

 

 

Health Insurance Tax Benefit

From the time taxes have come into existence there has been a constant struggle between the tax collectors and tax payers. The collectors want to collect more taxes so that the government will have more money to invest in the developmental works, and hence improve the economy on the other hand it is us or the tax payers who want to reduce the tax liability. The government gives deductions and tax exemptions for some of the investment done by the assessee to encourage him to invest in some of the businesses. Earlier on the Tax laws were stringent and the provisions were not lucrative enough to drive people to invest keeping tax planning in mind.

With the amendment of Income Tax Act and the passage of time, there seems to be a dramatic improvement in the investment options available to save tax. Insurance has always been viewed as an investment and a tax saving tool. One major mistake we all do is to plan for tax saving only towards the last quarter of the financial year, and thus, we end up taking many investment decisions in haste.

Therefore assessing each option carefully and then choosing the right investment plan has become pivotal in making tax saving a profitable exercise. Insurance is one such tool. If any person knows the benefits under the Income Tax Act, Tax Planning will be much simpler activity.

Know about Insurance

Insurance can be defined as a risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by event(s) beyond the control of the insured party. Under an insurance contract, a party (the insurer) indemnifies the other party (the insured) against a specified amount of loss, occurring from specified eventualities within a specified period, provided a fee called premium is paid. Some of the basic types of insurance plans which give you tax benefit have been described below.

  • ULIPs Insurance plan

  • Child Plan

  • Pension Plans

  • Term-Life policies

  • Pure Endowment Plans

  • Endowment Assurance Plans

  • Money-Back Plans

  • Health (Med-Claim) Plans

ULIPs Insurance Plan

ULIPs stand for Unit linked Insurance Plans. These are a type of investments which have the characteristics of both insurance and mutual fund. A part of the invested amount goes into insurance cover and remaining into an asset class. ULIPs usually have higher entry costs, brokerage and commission. The price of insurance cover is higher in a ULIP plan compared to a plain insurance policy.

Child Plan

These are the plans that provide cover to the life of the child’s parents/guardian/grandparents. These are term plans. These plans basically ensure that the child’s future is not put in jeopardy in case of death of the parent/guardian/grandparents of the child. Usually child plans are calculated to mature at important events in child’s life, like pursuing higher education or marriage. The sum is receivable irrespective of the survival/death of the insured.

Pension Plans

It is a plan that assures, one will continue to earn income and enjoy a comfortable life even after retirement. It has gained importance off late because of job insecurity, mid-career shifts. Mostly insurers provide two types of pension plans, endowment and unit-linked plans.

Term-Life policies

These are the kind of insurance contracts which cover the life of an individual over a period of time. The benefits will be paid if and only if the risk happens during the term of the policy.

Pure Endowment Plans

These are similar to term life plans. The basic difference is that the benefit will be paid if and only if the insured survives the term.

Endowment Assurance Plans

The best form of explaining this kind of a policy is that it is a combination of term life policy and pure endowment plan. This is a form of life insurance that assures one about the payment of a specified amount on a specific date or to the beneficiary upon the death of the insured before that date.

Money-Back Plans

These are ideal investment options for those who look for both insurance and savings. In these kinds of policies a certain percentage of the sum assured is remitted to the insured throughout the term of the policy. These remittances are tax-free. In case the insured survives the term, he receives the corpus with accrued options like bonus. In case of death of the insured before the expiry of the term, the nominee or legal heirs get the sum assured irrespective of the instalments received, with accrued benefits.

Health (Med-Claim) Plans

This plan falls into the general insurance category. This basically covers medical expenses one may incur on account of illness and subsequent hospitalisation. However, life insurance companies have started coming up with health plans.

We often buy insurance policies without analysing the benefits. For instance insurance policies like endowment, money back don’t make good investment options because of;

  •    Longer lock-in periods

  •    Larger initial outlay

  •    Lesser relative returns

  •    Poor surrender value

Tax Saving Provisions through Insurance

Section 80C

Any tax payer can invest upto Rs. 150000/- in EPF, PPF, life insurance premium, NSC, infrastructure bonds, pension plan premium, tax saving mutual funds, home loan repayment without any sub limits. Earlier on tax laws did not provide for exemption on premiums paid towards pension plans. However, the current provisions cover that also, hence, retirement planning has also become an interesting investment option.

Section 80D

 Amount paid towards the premium of med claim insurance policy by an assessee can be claimed for deductions under this section.

The deductions available under this section are;

  • Rs.15000 or premium paid whichever is less in case of medi-claim premium paid for self and non senior citizen dependants and an additional deduction of Rs.20000 or premium paid whichever less in case of medi-claim premium is paid for dependant senior citizens.

  • In case a senior citizen pays premium for himself towards his medi-claim policy then exemption available is upto Rs.20000/- or premium amount paid whichever is less.

This can be explained with the help of the following example:

  • Mr. Swaminathan pays premium on Mediclaim policy for self – Rs. 8000/-, for spouse – Rs.10000/-, for father (aged 70 years) = 6000/- and for father in law (aged 72 years) - Rs. 5000/-.
  • Mr. Swaminathan pays a total of Rs.18000/- for him and his wife. Deduction available is Rs. 15000/premium paid whichever is less.
  • He has also paid Rs.6000/- towards the premium of his father and thus he is eligible for an additional deduction of Rs.20000/-or premium paid whichever is less.
  • Thus total deduction available to Mr. Swaminathan in this case is Rs.21000/-
  • He is not eligible for any deduction for Mediclaim premium paid for his father in law, because he is not a direct dependant.

Section 80DD

In case of premium paid for medical treatment of disabled dependent, an exemption of Rs.50000/- is available and an exemption of Rs. 75000/- in case of severe disability.

Section 10(10D)

Any sum received as profits from the policy are exempt and the sum assured one receives is also exempt. Any amount an individual receives is exempt from tax as benefit from the insurance policy

Insurance Tax Benefits

Section

 

Benefit upto

 

Section 80C

Rs.100000/- includes premium paid on life insurance and pension plans

 

 

Section 80D

Rs.15000/- towards payment of premium on medical insurance plans on self and non senior citizen dependents. An additional deduction of Rs.20000/- towards payment of premium on medical insurance plans of senior citizen.

 

Section 80(DD)

Upto Rs.50000/- on premium paid for covering the medical insurance of disabled dependent and Rs.75000/- in case of severe disability

 

Section 10(10D)

Any profit or sum assured received is exempt

Some tax planning tips to sum up the article would be:-

  • Utilize the Provision of Section 80C
  • Learn to think beyond Section 80C, Avail benefits under section 80D and 80DD
  • Restructure your Salary

Many investors feel tax planning is little more than a compulsory business activity to save tax. Tax planning is a lot more than blindly applying to insurance policies. Tax planning has to be an activity that contributes to personal financial goals as well as reducing the tax liability. Tax planning has to be taken up as a continuous activity rather than a onetime affair.

Realated Articles

 

Article Author

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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