The purpose of a life insurance policy is to set aside funds for future expenses or provide financial protection against the death of the policyholder. However, most taxpayers buy a life insurance policy to save tax. The guiding factors for the purchase of a life insurance policy must be financial protection and risk-free investment.
Life insurance is a risk-free investment with benefits of bonus accruals. A term insurance policy can help accumulate a corpus for future needs such as children’s education, marriage or any other future requirement. The term policy also offers financial protection in the untimely death of the policyholder. A lump sum amount will be available to the family in the event of the death of the policyholder.
From a tax savings perspective, the premiums paid towards life insurance are allowed as tax deductions up to a limit of Rs 1.5 lakh. A maximum of Rs 46,800 is available in tax savings at a peak rate of 30% (applicable to taxpayers in the tax bracket above Rs 10 lakh). The maturity amount received is tax-exempt subject to certain conditions. The tax benefits make buying life insurance more lucrative.
Budget 2020 has introduced an optional new tax regime. A taxpayer choosing the new tax regime cannot claim tax deductions for life insurance premium paid. However, the maturity amount received continues to be tax-exempt. Thus, even in the absence of tax deduction for premiums, a taxpayer can choose to invest in life insurance for the benefits of financial protection and tax-exemption of maturity proceeds.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.