Having a proper tax solution has taken its place as one of the key components involved in personal wealth management, where individuals are churning out ways to reduce their taxes using legitimate means. Insurance plans has shown the potential of strong highway in this front delivering two hands on one place first hedging and later tax efficiency;
Here, you will get to know the top five benefits of using tax planning with insurance. These benefits illustrate the power of insurance as a tool not just for risk protection, but also an advanced solution for tax efficiency and wealth transfer.
1. Exemption of Life Insurance Proceeds from Taxes
It is therefore necessary to show that life insurance is a very important factor to consider in any financial planning. The money received from an insurance policy is totally tax-free as per section 10(10D), and therefore they offer good tax planning.
It is quite necessary to have life insurance to guarantee that the family remains financially buoyant in the unfortunate incident of the premature demise of the breadwinner. This part of the nomination/family members pay lump-sum or regular income that would allow nominees/family members to live comfortably is not subject to tax. This helps to ease the pressure on families, especially those who are mourning the loss of their loved ones, financially.
Moreover, the amount, which is paid in advance towards health insurance policies, is also allowed as a deduction in terms of section 80C up to Rs 1. 5 lakhs in a year. This deduction assists in lowering the amount of taxes that have to be paid on the earned income annually. Hence, the selection of the right life and health insurance covers with higher sum insured in case of needs allow maximum tax benefits.
2. Pension plans eligible for tax exemptions
Other retirement benefits that are vital include pension plans. Some of the pension plans are tax saving where for instance in annuities, one is able to save for a more lucrative retirement package.
Gifts made to the annuity funds for the purpose of receiving annuity income up to Rs. 1. 5 lakh annually are tax deductible under section 80CCC. Besides it, the maturity benefits and the annuity income are also tax-free under section 10(10A) of the income tax act making pension plans a tax-efficient investment.
Similarly, there is no tax on surrender value withdrawals for pension plans and as per section 10(13) of the income tax law. This provides a way of accessing funds in the times of disasters without any money going to taxes. The guaranteed lifetime income means certainty of pension along with the tax efficiency in the case of guaranteed lifetime income plans. This is because starting early yields larger corpus due to compounding hence increases the chances of achieving better results.
3. Health Insurance Tax Incentives
Most people consider having adequate health insurance as crucial in the present generation due to the soaring cost of medical care. But as it is, the prospect of the health plans is made even much more appealing by the good tax policies that come with them. For medical insurance for self, spouse and children, the premium paid is allowed as deduction without any limit under section 80D. There is also an allowance for additional deductions that can go up to Rs 50,000 to cover parents under health insurance as well.
Choosing a correct amount of medical insurance for a family at a young age provides required coverage in the later phase of life plus getting tax exemptions on a yearly basis continuously. This in turn leads to a decrease in the overall tax bill.
Not only employee paid group health insurance premiums are tax deductible to the employee but even employers provided group health insurance perks are tax free to the employee. Employer coverage with top-up policy is the best coverage policy planning that gives the best coverage and maximizes the tax advantage.
4. Ability to Create Wealth with ULIPs
ULIPs or Unit Linked Insurance Plans are a good financial tool that helps you save tax. They offer livelihood coupled with prospects of making money in the long run during life.
ULIPs are taxed under the same section as many other tax saving instruments thus helps to lower annual tax liability, if the contributions made for ULIPs are up to Rs 1. 5 lakhs.
In addition, if the investor switches between funds in ULIPs, they are not charged any capital gains tax under Section 10(10D). It also offers the option to diversify assets in order to balance the risk appetites of both parties.
The amount received under the death benefits are also tax-free under section 10(10D) as like endowment and term assurance plans. ULIPs hence provide help in the creation of wealth at a faster rate while being tax efficient in the long run.
5. Structured Settlements: Ridings and Settlement Options
Riders can complement the aspects of disability, critical illness etc at relatively less cost. Some of these riders also attract tax deductions for the premiums that we pay for them as well.
Like the previous provisions, section 80DDB also provides additional deduction to the extent of Rs. 40,000 per annum for expenditure incurred for medical treatment of the self or any dependent relative for diseases or ailments mentioned in the specified list of critical diseases. Selecting a suitable critical illness rider thus allows for minimisation of tax burden in case the condition, unfortunately, develops.
A distinctive feature of ULIPs is that one can opt for a regular payout after the policy matures rather than receiving the entire maturity value in lumpsum. This allows for the stretching of tax dues across a specific period instead of a specific financial year only. This way, it will be possible to structure withdrawals while making sure that taxes are optimized and necessary financial precautions are taken.
Conclusion
Tax planning is the process of planning on how one can reduce taxes legally and thus achieve the maximum possible amount of tax credits. Selecting proper life, health and retirement policies with corresponding complete insurance in early periods guarantees financial security for the client and his/her close ones; besides, there are tax-saving opportunities every year and when the policies mature, including significant life insurance tax benefits.
