Guide on How Term Insurance Remains Favourable Tax Saving Instrument Post GST
Term insurance is one of the most affordable and preferred life insurance policy. Purchasing a term insurance plan is an important financial instrument to consider while diversifying your portfolio. It is also a beneficial tax-saving financial instrument.
Understanding term insurance plans
Term insurance policies offer coverage for a fixed period of time. In case of an unfortunate event of death during the term of the policy, your beneficiaries are entitled to receive the sum assured. This amount acts as income replacement in case you are the breadwinner of the family. Your loved ones may use the insurance amount to meet financial obligations and live a comfortable life even in your absence.
Introduction of Goods and Services Tax in India
The Government of India introduced the Goods and Services Tax (GST) to bring about a standard tax policy in India. GST was considered as one of the biggest fiscal reforms in the country. It replaced numerous indirect taxes, such as excise duty, value added tax (VAT), and service tax, among others. The implementation of GST on 1st July 2017 had a huge impact on numerous industries, including the insurance industry in India.
Prior to the launch of GST, the service rate of insurance products, including term insurance, was 15 percent. This 15 percent included 14 percent of basic service tax, and 0.5 percent each of Swachh Bharat Cess and Krishi Kalyan Cess. After the launch of GST, service tax became a part of GST. The rate of tax was increased further by 3 percent, bringing it to 18 percent. This indicates that premiums towards term plans would become costlier.
Tax benefits of term plans post GST
Even though term insurance plans have become more expensive, financial advisors recommend purchasing such an insurance policy due to the numerous benefits it has to offer. Term plans offer a comprehensive coverage at an affordable premium. Another major advantage of term plans is tax benefit available on premiums paid.
Following are the three major tax deductions that you may claim on your term insurance policy.
1.Tax benefits on premiums paid
You may avail of tax deductions on your premiums up to a limit of INR 1.5 lakh under Section 80C of the Income Tax Act, 1961. The premiums may be payable towards the term plan for self, spouse, or dependent children.
2.Tax benefits on riders
Riders, also known as add-ons, enhance the coverage of your insurance policy. The insurance providers offer various add-ons for term insurance policies. You may claim additional tax benefit on such riders. For example, premiums paid towards term plans with critical illness cover are exempt up to INR 25,000 under Section 80D of the Income Tax Act, 1961.
3.Tax exemption on the death benefit amount
The death benefit that your loved ones receive in an event of your untimely death is tax-free under Section 10(10D) of the Income Tax Act, 1961.
Though the implementation of GST has increased the premium of term plans, the benefits of such a plan offset the high cost. You may, therefore, avail of a term policy and enjoy the numerous tax benefits it has to offer even post GST.
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