The Basics of Tax Benefits on Insurance – Auto, Health and Term

It has been estimated that approximately 76% of Indians lack financial knowledge. Are you among the 76%? Understanding the basics of personal finance can help manage finances effectively and take informed decisions about your personal finances. Earning, saving, investing and insurance – are all a part of financial planning. 

Insurance as such has a reputation, perhaps unfairly, of being confusing and too difficult to understand. Add to it the tax benefits of insurance and one is certain to feel at sea. In this blog, we will tell you all you need to know about the basics of tax benefits on different types of insurance; term, auto and health.

Term insurance and tax benefits

What is term insurance?

Term insurance is a type of life insurance plan for a specific period of time. It is normally a pure death benefit type of plan, meaning the benefits of term plans are available only when the policyholder dies. Term insurance is a form of life insurance. It covers death risk and pays a lump sum death benefit to the beneficiaries of the insured. In case the insured survives the policy period, no benefit is given. The only exception is in the case of premium return policies, where the total premium paid till date is refunded to the insured. In premium return term policy, the policyholder receives an aggregate of all the premiums paid. Term insurance is purely a financial security tool for the dependents of the policyholder. It is most useful to families that have a single earning member. 

Key points to know about tax benefits of term insurance:

• Premiums paid for term insurance plans are eligible for tax benefits of up to Rs 1.50 lakh a financial year under Section 80C of the Income Tax Act. 
• Such premiums are eligible if they are paid on life insurance policies of self, spouse, and dependents.
• There are three broad sections of the Income Tax Act, under which the insured can claim tax benefits in the case of term insurance.

Section 80 C

Premiums paid for term insurance plans are eligible for tax benefits of up to Rs 1.5 lakh under Section 80 C. However, the following points should be considered:

• The annual premium for the term plan should not exceed 10% of the sum insured. If the premium exceeds 10% of the sum insured, then the tax benefits are calculated proportionately.
• It should be noted that the above rule differs for policies bought before March 2012. The tax benefit is applicable if the premium does not exceed 20% of the sum insured.
• If the policyholder surrenders the policy within two years of purchasing the policy, the policyholder is not eligible for any tax deductions and the benefits claimed will be treated as income in the hands of the insured in the year in which the policy was surrendered.

Section 10 (10D)

Under Section 10(10D) of the Income Tax Act, the policyholder can avail of tax benefits if the premium for the policy is less than 10% of the sum insured.

If a policyholder dies before the maturity period, the sum insured payable to the nominees is completely tax free under Section 10 (10D) of the Income Tax Act. 

Section 80 D

If there are any riders included in your term insurance, such as surgical care, hospital care, critical illness, among others, you can avail tax benefits of up to Rs 25,000.

Health insurance and tax benefits

What is health insurance?

Health insurance is an agreement between a health insurance company and a policyholder wherein the insurance company agrees to compensate the insured for medical expenses for the policyholder in exchange of premium. Here, medical expenses normally refer to hospitalization, although there are exceptions. Health insurance policyholders can avail many tax benefits on the premium paid towards the policies. Let’s look at the tax benefits under various sections. 

Section 80D

Under Section 80D, an individual or a HUF (Hindu Undivided Family) can avail of tax deductions. The premium paid towards a health insurance policy can be deducted from the total taxable income. 

Tax deductions under different situations according to age:

• Individual or all family members under 60 years: Up to Rs 25,000 can be deducted from the taxable income. This Rs 25,000 should have been paid as premium or towards preventive health check-up.
• Individual, all family members and parents under 60 years: Up to Rs 25,000 can be deducted from the taxable income. (Rs 25,000 towards self and family insurance + Rs 25,000 towards parents insurance), taking the total benefit to Rs.50,000 per annum.
• If the eldest member in the family is under 60 years and parents are above 60 years: Up to Rs 75,000 can be deducted from the taxable income. (Rs 25,000 towards self and family insurance + Rs 50,000 towards parents insurance)
• Self or eldest member in the family is over 60 years and parents are over 60 years: Up to Rs 1 lakh can be deducted from the taxable income (Rs 50,000 towards self and family insurance + Rs 50,000 towards parents insurance). This is the maximum benefit that can be legitimately claimed by a person under Section 80D in a single year.

Tax benefits under Section 80DD

Under Section 80DD, a taxpayer can avail tax deduction towards treatment expenses incurred for a disabled dependent. The disabled could be a spouse, children or parents who are dependent on the taxpayer.

The maximum deduction under Section 80DD is Rs 75,000, which should be incurred towards medical treatments, rehabilitation, nursing and caretaking. Cases with severe disability are eligible for a tax benefit of up to Rs 1.25 lakhs per annum. 

Tax benefits under Section 80DDB

Section 80DDB lists specific ailments for which an individual is eligible for tax deduction. An individual can avail of tax benefits under this section for medical expenses towards the specified diseases for self or a family member. 

 Conditions under which one can avail of tax deductions under Section 80DDB:

• To avail this benefit, the taxpayer has to provide a certificate of the disease. The diseases listed under this section are: dementia, ataxia, aphasia, Parkinson’s, motor neuron disease, cancers, thalassaemia and AIDS among few other diseases.
• For individuals and family members under the age of 65 years, the limit of deductions is Rs 40,000 paid towards the treatment of the disease.
• For senior citizens and super senior citizens, this amount can be up to Rs 1 lakh.

Deduction under Section 80U 

• Section 80U offers tax deduction benefits to persons with disability. 
• The person must have a disability certificate in order to avail of tax benefits.
• The person with a minimum 40% disability can avail of tax deduction.
• Persons with severe disability – 80%, can avail of additional tax deductions.
• The disabilities specified under Section 80U are: blindness, low vision, hearing impairment, loco motor disability, mental retardation, autism, mental illness, leprosy and cerebral palsy.
• Under section 80U, individuals suffering from a disability can claim for tax deductions for self only.

Auto insurance and tax benefits

What is auto insurance?

Auto insurance is an agreement between an insurance company and a vehicle owner. According to this agreement, the insurance company is liable to pay towards damages caused to the insured car due to accidents, natural calamities and other reasons. There are different types of car insurance plans. Unlike other types of insurance, auto insurance is mandatory in India. 

If a car owner uses the car for commercial purposes, the premium paid on the car’s insurance is considered an expense for the business and is eligible for tax benefits. Cars used for personal purposes are not eligible for any tax benefits. In cases where the car has been used partly for commercial purpose and partly for personal use, the tax benefits are applicable only towards the proportion of commercial use of the vehicle.

In a nutshell

Insurance – health, term or auto – is first a tool for financial security to meet the adverse consequences of life and should be treated important for that reason. Tax benefits should not be the sole reason for customers to buy insurance plans. Experts are of the opinion that insurance should be treated as a key part of every personal and family financial plan. 

Just like investments and other financial instruments, insurance too should be reviewed periodically to incorporate changes to suit the growing or changing needs of policyholders. Regular reviews of insurance portfolios can help policyholders enhance their financial security as well as avail of more tax benefits, if planned well. Would you like to review or revise your insurance portfolio for better tax benefits? Reach out to us.