New Delhi: Many people know the importance of saving their income tax by investing in some insurance policies, but very few do it on time. Some people do it in the last moment, only to hurriedly invest money here and there to meet the March 31 deadline.

And as soon as the month of March begins, so many people, especially the salaried people struggle to calculate how much tax they need to pay and look for available options to make the right investments.

With less time left for filing the ITR, taxpayers create the error of investing without evaluating various tax saving products and features.

Hence, while investing in different tax-saving products, it is crucial to know the right investment products at the right time.

Investing a portion of your total savings in some securities is an ideal method of tax planning out of which life insurance is one of the most effective and preferred avenues across all investments.

While the main objective of life insurance is to provide financial protection to its beneficiaries, in case of unforeseen events, it also goes a step ahead to offer a host of tax benefits which is an icing on the cake.

Purchasing a life insurance policy which you feel is suitable for you as it not only offers you protection but also offers tax benefits under Section 80C of the Income Tax Act, 1961 and Section 10(10D) of the Income Tax Act, 1961.

Let’s understand how to go about tax planning

Term Insurance

With term insurance, you not fulfil the responsibility of providing a financial responsibility to your family but also avail tax benefits in the process. Any amount for premiums paid towards life insurance policies is eligible for tax benefits. The deduction can be claimed for premiums paid for insuring self, spouse or children. If you are paying for the premiums of more than one insurance policy, all premiums can be included for the tax exemption under the section 80C of the Income Tax Act, 1961. The maximum deduction limit under the section is Rs 1.5 lakh.

Unit Linked Insurance Plan (ULIP)

ULIP is a life insurance product that is an attractive combination of investment and insurance. A portion of the amount invested in ULIPs is used to provide risk cover, and the balance amount is invested in the stock market. By investing in ULIPs, you can easily save tax under sections 80C and 10(10D) of the Income Tax Act, 1961. Since, ULIPs are market-linked, the rate of interest varies. A ULIP comes with a mandatory lock-in period of 5 years and can be bought for a term of 15,20,25 or 30 years depending upon your needs and requirements. A person can invest higher than 1.5 lakh but the maximum deduction allowed is up to 1.5 lakh.

The annual income till Rs 2.5 lakh will not be covered under any tax. If you fall under the bracket of Rs 2.5 lakh to 5 lakhs, you are under the tax rate of 5%. An investment of around Rs 1,50,000 can save you around Rs 7,800. If your income falls between 5 lakhs to 10 lakhs, an investment of Rs 1,50,000 can save you around Rs 31,200 annually. If you fall under the uppermost tax bracket which is 10 lacs and above, the tax rate applies at the rate of 30% which means you save around Rs 46,800.

Taxation on Life Insurance Proceeds

While making an investment, it is not just the tax saving factor that should be kept in mind, the return of the investment factor must also be given appropriate importance. The amount received by a nominee as death benefit and life insurance pay-outs received on maturity qualifies for tax exemption under section 10 (10D) of the Income Tax Act, 1961. Also, the maturity amount you get on ULIPs are also tax-free which isn’t available in other investment vehicles such as ELSS.

The bottom line

In order to save taxes last minute, some insurance agents may try to sell you unsuitable insurance policies under the guise of helping you save tax. Another malpractice adopted by some agents is to sell a policy in the first few days of April (i.e. after the March 31 deadline is over) and tell the buyer that they would backdate the purchase to show that it happened in the previous financial year. However, this is not a written commitment and is also not legal. The only right thing you can do is to invest at the right time which is the first day of April itself.

While for a lot of people it might not be practical, then starting tax planning in December can work out for you. It means you don’t take any major decision like purchase of any insurance and investing in equity funds without detailed comparison and analysis.

Written By: Santosh Agarwal, Chief Business Officer- Life Insurance, Policybazaar.com