Saturday, February 21, 2009

INSURANCE AND TAX IMPLICATION

Freinds, we have all seen all those ads where insurance companies try and sell their products using tax saving as a basic premise rather than insurance itself which is the basic feature of the product.The result is that insurance is sold more as a tax saving tool rather than risk hedging one.

So its imperative to analyse whether there are any loopholes or lacunaes in that premise as well. Whether we get the tax benefit that companies claim we get and if yes are there any exclusions??

Lets see the benefits/drawbacks from tax perspective only:

1. Premium upto Rs 100000 is deducted from gross income under Sec 80C and is completely tax free

While this is true in most cases what we need to remember is that for us to be able to get the tax benefit the premium paid on insurance should not be more than 20% of the sum assured on the policy becuase only 20% of the SA is tax free, rest is not.SO for instance if you pay RS 35000 as premium for policy of SA of 100000 you can claim tax benefit only till Rs 20000 and not for full SR 35000.


2. Minimum lock in of 3 years
To be able to claim tax benefit one needs to be invested atleast for 3 years else he /she will have to forego the tax benefit.

3. Only 33% of the maturity proceeds from Pension fund are tax free
Contrary to what most agents claim, only 33% of the maturity proceeds from a pension fund is tax free . Rest is taxable.

Good news is that for other policies , 100% of the maturity proceeds are tax free under Sec 10 10 d.

Happy investing....

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