The tax rates under the new tax regime are much lower. As such, opting for the old tax regime might be beneficial only if you can fully utilise all the deductions available from Section 80C to 80G. So, buy insurance only for adequate coverage and not for tax saving purposes if you are filing ITR under the new tax regime
The new tax regime is gaining in popularity, despite the lack of many deductions and exemptions available under the old regime, primarily because of the lower tax slab rates. As such, a large chunk of taxpayers are opting for the new tax regime, despite the fact that deductions under Section 80C for life insurance premiums and Section 80D for health insurance premiums are not available under the new tax regime.
Says SR Patnaik, partner (head-taxation), Cyril Amarchand Mangaldas: “It does not make sense for taxpayers who are opting for the new tax regime to buy insurance as a tax-saving instrument. However, it must be noted that an insurance policy should be bought only as an insurance for financial security and should not be obtained only to avail tax benefits.”
The Main Purpose of Insurance Is Financial Protection, Not Saving Taxes
Insurance policies, whether they are health or life insurance, should be purchased with the primary objective of ensuring financial protection. Any tax benefit should be treated as a secondary or incidental advantage, not the main reason for buying the policy.
Says Deepak Kumar Jain, founder and CEO, TaxManager.in, a tax advisory and e-filing portal platform: “Insurance should be bought for adequate coverage, not for tax benefits. Life insurance products, including unit-linked insurance plans (Ulips) and endowment plans, can still serve as effective long-term financial planning tools, but only when aligned with individual financial goals, not just for tax planning.”
Why The Old Tax Regime Does Not Make Sense For Most Taxpayers
Under the old tax regime, tax deduction against life insurance premiums (Section 80C) and health insurance premiums (Section 80D) are effective tax-saving options. Additionally, home loans also offer tax benefits—principal repayment qualifies for deduction under Section 80C, and interest payments are deductible under Section 24(b).
Says Jain: “The old tax regime may be more beneficial if you can fully utilise these deductions, as it significantly reduces your taxable income. For instance, if your total deductions under Section 80C to 80G exceed Rs 5-6 lakh, the old regime can be more advantageous for a few taxpayers. However, if your total deductions are lower than that, you are more likely to benefit from the new tax regime, which offers lower tax rates without exemptions or deductions.”
One needs to understand that the old tax regime offers a significant deduction of up to Rs 2 lakh for home loan interest payments in case of self-occupied property, which is not available under the new tax regime.
In such a case, if deductions can be maximised under the old tax regime by availing of life and health insurances, then the balance may slightly tilt in favour of the old tax regime for taxpayers with low-income levels. “However, for persons with income beyond a threshold, the new tax regime will be more beneficial even if all deductions are available under the old regime because the tax rates under the new tax regime are much lower,” says Patnaik.
The new tax regime also allows for ease of filing, making it more efficient in terms of both time and cost. Hence, the tax liability under both regimes should be computed by the taxpayers before deciding whether the old tax regime shall be more beneficial and if such marginal tax savings offered under the old tax regime outweigh the advantages of the new tax regime.