Taxation and insurance are two unavoidable factors for anyone. Insurance provides you with financial help during a time of need. For instance, if you have life insurance, you can be sure that your family will be financially protected even in your unfortunate absence.
On the other hand, taxes help governments run the country. It helps them build infrastructure and other facilities that help us lead a comfortable life. Hence, paying taxes on time is a necessity.
But how is insurance taxed? And what are the tax benefits that they carry? Let us take a look.
What is an insurance plan?
Insurance is a financial safeguard that may assist you and your loved ones in recovering financially in the event that anything unfortunate occurs, such as a fire, theft, legal action, or automobile accident. When you take insurance, you will be given an insurance plan, which serves as a legally binding agreement between you and the insurance company that you choose. And when you incur a loss that is covered by your policy and submit a claim, the insurance company will either pay you, the policyholder, or a chosen recipient, known as a beneficiary, depending on the terms of your policy.
The most challenging aspect of having insurance is the fact that you have to pay for something that you desperately wish you would never have to use. Nobody wishes for anything unfortunate to take place for them. But if you don’t have insurance and you incur a loss, you might find yourself in a tough financial position& it will also help you in tax planning
Taxation of insurance
Taxation is applicable to the proceeds of an insurance policy. Proceeds are the claim you get when you have to, unfortunately, use the insurance policy. Taxation here depends on the type of policy.
Life insurance pay-outs in excess of Rs 1,00,000 that do not qualify for an exemption under Section 10(10D) will have a TDS of 1% deducted by the insurer beginning in October 2014.
Bonus payments are also subject to TDS. If the amount received is less than Rs 1,00,000, then no TDS will be deducted; nonetheless, the whole money that you get will be completely taxable for you. In your return for income tax, you may request a credit for the TDS that was deducted.
The insurance maturity funds from single-premium insurance plans are considered taxable income and are not excluded from taxation under the provisions of section 10(10D) of the Income Tax Act.
Insurance tax benefits
Even though insurance is taxable, there are some tax benefits that come with investing in them. According to subsection 80C of the Income Tax Act, you may be able to claim a tax deduction for any life insurance premiums that you have paid that were for the purpose of ensuring either your own life or the lives of your spouse or children. The deduction provided by Section 80C must be granted regardless of whether or not your kid is financially dependent on you, financially independent, a juvenile or an adult, married or single. Under Section 80C, a deduction like this one may be claimed by either a person or a Hindu Undivided Family. To take advantage of tax benefits under insurance we must understand importance of tax planning.
Understanding the tax liability of any product is important, but for insurance, it is crucial. Hence, use the above information to understand insurance taxation before purchasing an insurance policy.