Child insurance products are considered long-term investments as they help in providing financial security to children and secure their future goals like higher education through regular investments.
To encourage and motivate people to buy life insurance products and enhance their financial safety net, the government provides tax benefits on such investments.
Here are some important things that you need to know about tax benefits associated with child plans:
Tax deduction on premiums: The Income Tax Act, 1961 entitles you to tax deduction of the premium amount for your life insurance policy. This limit, under Section 80C of the Act, is capped at Rs 1.5 lakh per annum for all investments eligible under this Section.
This means you need to take into account premiums for other life insurance plans other than the child plan. Also, note that for every individual policy, the maximum premium eligible for deduction is 10% of the sum assured of the policy.
For example, if you have a policy with a sum assured of Rs 1 lakh and an annual premium of Rs 15,000, the premium eligible for deduction under Section 80C will be only Rs 10,000 (i.e. 10% of Rs 1 lakh).
Deduction for maturity amount: The maturity amount of a life insurance policy is also eligible for tax deduction under Section 10 (10D) of the Income Tax Act. If you have regularly paid at least the first five premiums of your life insurance plan, you do not need to pay any tax on the maturity proceeds from the policy.
The maturity amount after completion of the policy term or the premature withdrawal can be completely deducted from your taxable income. Further, death benefit from the policy is tax-exempt in the hands of the beneficiary, typically your spouse or child. Here, it is worthwhile pointing out that with regular pay hikes, people typically move up income brackets applicable for taxation. So, a feature of having tax-exempt maturity proceeds helps.
Section 80D deduction for health insurance riders If you have health insurance riders attached to your life insurance policy like a child plan and are paying an additional amount for it, you can claim tax deduction under Section 80D. The annual tax deduction limit is up to a maximum of Rs 25,000 in a financial year. For senior citizens, it is up to Rs 30,000.
How to not lose out on tax benefits: If you surrender a policy before paying five premiums, you become ineligible for any tax deduction benefits on premium payments and proceeds. So, the amount that you get after the surrender of the policy is added to your taxable income in the year in which you receive the surrendered amount.
When it comes to tax on the maturity amount, you can avail yourself of the deduction benefits under Section 10 (10D), only if the sum assured of your policy is not less than 10 times your annual premium.
To sum up, tax benefits add to the substantial advantages of life insurance plans, especially child plans. It provides you with yet another compelling reason to invest for your child’s future.
(The writer is CMO and Head Products & Strategy at IDBI Federal Life Insurance)