Buy life insurance policy for protection against unforeseen events

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.

Also Read: Union Budget 2020: Not All Deductions Are Disallowed in New Tax Regime

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. 

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in