80C, 80D, 80CCC, 10(10d) – Save Tax with Life Insurance, Health Insurance, Pension Plans

This article is applicable for FY 2014-2015 and is updated as per the Budget announcements on July 10, 2014.
 
Over the years, especially in the recent past, we’ve seen increasing attention (and also action) in the area of personal finance and the tax benefits that they provide.  We have seen our Finance Ministers and doing a fine balancing act between the personal aspirations of its people and the demands of the Central balance sheet. We have seen our Financial Regulators constantly representing our customers to ensure they are protected and that they get maximum benefits from whatever they invest into.
 
Of course, we still have a long way to go, and hopefully we will.
 
Key Sections that Provide tax benefits on purchase of Insurance and Pension plans

Section 80CCE

This section provides immediate tax savings for investments made in a financial year.  This section limits the benefit from 3 other sections – 80C, 80CCC, 80CCD through reduction of your gross taxable income up to a maximum limit of Rs. 1.50 lakhs in a financial year.
 

• Section 80C

Section 80C covers investment in various financial instruments including Life Insurance (including Term Insurance, Child Plans, ULIPs, all Savings Plans, Wealth Plans and Pensions Plans, but excluding Health Plans) up to a maximum limit of Rs. 1.50 lakhs in a financial year.
 
Please note that to get Section 80C benefit
1. Investment should be in your, your spouse’s or children’s name.
2. Renewal premium for life insurance paid for a policy bought in an earlier year also get the same tax benefit.
3. Life Insurance cover (Sum Assured) of the policy is at least 10 times that of your Annual Premium in the year of premium payment.
 

• Section 80CCC

This section is exclusively for benefit through investment in Pension Plans (excludes PF, PPF, Superannuation, VPF or NPS) and is also up to a maximum limit of Rs. 1.50 lakhs.
 

• Section 80CCD

This section is not applicable to Life Insurance or Pension plans and is therefore not being covered here.

Section 80D

This section is exclusively on tax benefits for Mediclaim, Health Insurance and Critical Illness policies/riders insurance premiums.  The limit is up to Rs. 15,000 per annum (Rs. 20,000 for senior citizens). Additionally, if the health insurance policy includes both parents who are aged more than 65 years, there is an additional limit of Rs. 20,000, making the maximum possible limit as high as Rs. 40,000.

Section 10(10d)

Get two substantial benefits from Life Insurance under this section.
 
1. Have you ever heard of EEE?  EEE stands for “Exempt-Exempt-Exempt” and means that …

• the amount you invest,
• the amount that your investment earns, and
• the amount that you finally receive as proceeds…

…are all completely Exempt from Income Tax.  You may have guessed it by now – yes, Life Insurance gets the “EEE” benefit, unlike most other savings instruments which get only the EET benefit (Exempt-Exempt-Taxed) wherein even if you get tax benefits on investments, your final received amount is taxed, reducing your overall returns.
 
So any sum received from a Life Insurance policy (excluding Pension plans) as maturity proceeds or death benefit is tax-free under Section 10(10d).  And that is why Life Insurance is a very efficient instrument tax-wise providing both tax-savings on investments as well as tax-free returns compared to other instruments which only offer tax-savings.  Else your gains could be reduced by as high as 1/3^rd of total gains. So after you pay taxes on what you gain, a 9% interest rate will end up becoming just 6% effectively. No such problems when it comes to Life Insurance!
 
2. Because it is under EEE, no TDS is applicable in Life Insurance.  This means that the insurance company does not cut any tax when the policy matures and the investment and gains come back to you.  This saves you the headache of having to claim your tax deduction back as tax returns.

Section 10(10A)(iii)

This is again a unique benefit applicable only to Pension Plans.  When your Pension plan matures and you are ready to start taking pension, you get the option to commute (withdraw) one-third of the value of the Pension fund on that date.  This amount is tax-free under section 10(10A)(iii) of the Act.
 
Important:
 
The following are NOT included for Tax Benefits under Section 80C, 80CCC or 80CCD.
 

• Any amount received from a Keyman Insurance policy is taxable.
• Any amount received from a Single Premium policy wherein the Life Insurance cover (Sum Assured) is less than 10 times the Single Premium amount, is taxable.
• Any payout from a Pension Plan excluding commuted amount (max 1/3^rd) but including pension (or annuity) itself, any surrender or withdrawal will be taxable through addition to your income in the year of inflow.

 
Conclusion
 
To avail of each of the tax benefits listed above, you can compare life insurance, health insurance and pension policies and buy them online to get an immediate premium receipt than can be used as proof of investment and submitted to your organization.
 
Happy tax-saving!