A Guide on Tax Implications of Insurance Policies

India has different types of insurance policies. These policies offer comprehensive financial protection to you and your loved ones during unexpected situations. Different types of insurance policies have different tax implications. It is better to understand different policies and their tax implications before buying them. Here are some key points to get aware of:

You must have heard about life insurance several times and its benefits. Life insurance is simply a policy where a policyholder pays a certain premium to the insurance company for a certain number of years. The insurance company in return pays the total amount to the nominee upon the death of the policyholder.

Life insurance is categorised in two types; whole life and term life.

Whole Life- This policy offers the protection for the policyholder’s whole life (upto 100 years). Moreover, the policy gives a death benefit and a savings component (accumulated cash).

Term Life-  One of the most affordable type of insurance that covers for a certain period of time such as 20 or 30 years.

The death benefit paid out to a beneficiary is generally tax-free. However, if the policyholder surrenders the policy or sells it for cash value, any gains may be subject to taxation. Additionally, if the policy is transferred for valuable consideration (such as a sale), it may trigger a taxable event.

In other words, if the premium in the policy is more than 10% or 20% of the amount assured, then the money received is fully taxable.

Health insurance

Health insurance is a type of insurance policy that covers the costs of medical expenses. It can be obtained through employers or insurance companies. This policy either covers or repay the medical expenditures incurred on diseases or injuries.

Premiums paid for mutual funds investment are typically tax-deductible (under Section 80D), subject to certain limitations. Under this section, tax benefits are provided to self, children and spouse towards health policy. You can also include your parents to get tax benefitsAdditionally, employer-sponsored health insurance is generally not subject to income tax.The amount to be claimed against tax deduction depends on those who are insured in the policy and can belong to any of four categories; Rs 25000, Rs 50,000, Rs 75000 and Rs 1 lakh.

There are different types of health insurance policies and each policy comes with tax benefits under Section 80 (D) which protects the insured person from unnecessary medical costs. You can choose anyone on the basis of risks and circumstances. The actual savings vary depending on the type of insurance policy and the amount of premium.

Endowment policy

Endowment policy offers financial protection against life’s risks while simultaneously saving consistently for a certain period of time. If the policyholder survives the term before the maturity of the plan, then he/she receives the lump sum payment. However, if the policyholder does not survive, then the entire endowment amount goes to the family.

Endowment plans offer the huge advantage of tax savings over the investment. Investors gain hugely from the tax-deductibility of premium payments done regularly. If anyone has taken this policy and now wants to abandon the policy, they can surrender it. However, the policyholder must fully pay the premiums of the initial two years to qualify for tax-free surrender of the policy.

This type of insurance policy offers both wealth management india and insurance benefits under a single policy. When you pay a premium for a ULIP, the insurer invests a portion in market-linked equity and debt instruments, while using the rest to provide life insurance coverage.

Long-term capital gains tax of 10% will be applicable on ULIPs. However, the government does not impose any taxation in the event of a person’s death.

It’s important to note that these rules can be complex and vary depending on individual circumstances. You should consult a qualified tax professional for advice on your specific situation.

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