Are you a tax-paying citizen of India? Are you planning to buy some financial instruments to get tax rebates? Well, you have come to the right place. There are many Life Insurance instruments that will help you save taxes, having said that, not all instruments will help you save taxes or provide the same benefit. Confused about which instrument to buy? This article will take you through all the technicalities of Tax Rebates.
What is Tax Rebate?
An individual can apply for a tax refund if the tax paid is more than the tax liability of that particular individual. In other words, if your tax due is less than what you paid, you can apply for a refund on your tax money at the end of every financial year. To claim this amount, you need to file an Income Tax Return.
What is Tax Deduction?
In simple words, when you make investments in any of the financial instruments mentioned below in the table, you can deduct that amount from your income while calculating tax.
Let us understand this better with the help of the example of Mr. Gupta
Mr. Gupta, a software engineer, has an annual income of ₹ 8 lakhs per annum. He buys a life insurance policy that has an annual premium of ₹ 1.5 lakhs. So under Section 80C of Income Tax, his taxable income will become ₹ 6.5 lakhs.
Types of Tax Rebates in Life Insurance:
| Section 80C | This section allows the deduction of the taxable income up ₹ 1.5 Lakhs Instruments under this section- ELSS Mutual Fund PPF EPF Life Insurance premium ULIP FD NSC |
| Section 10(10D) | Under this section, income received from the insurance policies is exempted. There is no capping on the settlement/maturity amount received. Hence, your maturity amount becomes totally tax-free under this section. |
Selecting Life Insurance for Tax saving purposes
This is a very crucial part since not all life insurance policies would help you get tax rebates. So, here is an important thing that you should consider before buying a life insurance policy.
The sum assured of your policy should be 10 times or more than the annual premium.
Let’s take the example of Mr. Gupta again,
If Mr. Gupta purchases a Life Insurance policy with an annual premium of ₹ 25,000 then his minimum sum assured should be ₹ 2,50,000. If his sum assured is less than ₹ 2,50,000, he won’t be eligible to get any tax rebate, and his maturity amount would also be taxable.
So to avoid this, always check the above-mentioned factor.
Conclusion
Isn’t it ironic how spending can actually help you save money? So as they say in Hindi ‘Ek teer se do nishane’ by spending your money now you’ll benefit in two ways –
Creating an asset by investing in Endowment plans or FDs.
Saving your money in the form of tax rebates
This is how various financial instruments can be used to avail of tax rebates.
