Morgan Stanley in one of its advertisements once said, “You must pay your taxes, but there’s no law that says you gotta leave a tip.”

Taxes are vital as no nation can prosper without it. However, taking forward the argument from Morgan Stanley people should take advantage of the various tax exemptions that the government provides.

Before we highlight the benefits, let me briefly explain taxable income and income tax liability. Let us suppose your taxable income, which is the portion of your gross income that is taxed, amounts to Rs 10 lakh. Your tax liability for the year would be computed based on this gross income and your income bracket. Now, suppose a specific investment option provides tax benefit up to Rs 50,000 per year. In that case, it is deducted from your taxable income, i.e. Rs 10 lakh. Thus, your tax liability would now be calculated on Rs 9.5 lakh. Your taxable income reduces as you invest more in tax saving options.

Why Life Insurance?

One of the most sought after tax saving options is to purchase a life insurance policy. Life insurance offers protection and stability to policyholders and their loved ones. It also helps them achieve their long-term financial objectives. Life insurance can be a traditional savings plan designed for the risk-averse to unit-linked insurance policies offering market-linked returns.

On the income tax front, premiums paid for life insurance policies are eligible for deduction under Section 80C of the Income Tax Act, 1961. Individuals can claim deduction up to Rs 1.5lakh in a financial year. If the policy is compliant with Section 10 (10D) of the Income Tax Act, 1961, the cover or sum assured and bonuses are entirely tax-free, subject to certain conditions.

LTC reimbursement against premium

There are more tax exemptions on a life insurance policy. Premiums paid on life insurance policies bought by employees between October 12, 2020, and March 31, 2021, would be eligible for reimbursement under the Leave Travel Concession (LTC) scheme.

Here’s how it works:

If your LTC is Rs 50,000 for 2020-21, you either produce travel tickets to claim it as a tax-free allowance or pay Rs 15,000 tax on it if you are in the 30 per cent tax bracket. Instead, the government has offered a window where you can avoid paying the tax without going on a vacation. However, you need to spend three times your LTC allowance (i.e. Rs 1.5 lakh) to purchase goods and services that attract GST of 12 per cent or more.

Life Insurance is the only investment option, which qualifies for the purpose of claiming the LTC benefit.

Conclusion

To sum up, life insurance is designed to provide various benefits to you and your loved ones. It includes protection, tax deductions and long-term savings, all of which help safeguard your financial future. However, before you buy a policy, ask yourself why you need life insurance. Once you have answered, find out how much insurance cover you need through most of your working life. The logical way to do this is to weigh your financial liabilities against your financial goals to arrive at your answer.

The author is Chief Distribution Officer, ICICI Prudential Life Insurance

DISCLAIMER: Views expressed are the author’s own. Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.