March 31 deadline is almost around the corner and a time when people look at a lot of tax saving instruments. It is usually an insurance policy in most of the cases and this is the time when we see a lot of mis-selling cases rising as far as insurance policies are concerned. A right way to look at insurance should be as an instrument against risk protection. But when it comes to saving taxes, you have a lot of options in insurance. How can one go about it?
Harshvardhan Roongta: Yes, we are at the fag-end of the financial year and at this point in time, all the individuals or rather most of them will be running around to save taxes because they have deadlines to finish with their investments to save tax. The most convenient person available would be a life insurance or agent around you and when you are in a hurry to save tax, most likely you will buy into something which is conveniently available rather than what is appropriate for you.
So, I would say do not invest in any product to save tax. It is not about insurance or any other investment product. You have to look at the merit of that product. You should ask yourself a question any time that you are going to be looking at investing; would you invest in this product if there were no tax benefits available? If the answer is no, then do not invest in it only to save taxes.
What you have to do is look at your requirements or your goals and your timelines, and then find a product which matches that goal and provides a tax benefit, so that is okay and that is good. But if you are investing only to save tax and it helps you no other way in your financial life, then you should definitely not look at it. At this point in time, as you rightly mentioned, towards the end of the financial year, you will have many cases of mis-selling, something that people will come and tell you and lure you for high returns probably and ask you to invest into something, well that is not how you should go about investing for your tax saving purposes.
How should one actually look at insurance as a product and also as a product that helps you save tax? Insurance product allowing you to save tax should be like a byproduct of this investment that you might want to look into or should that be the first priority?
Harshvardhan Roongta: First and foremost, insurance and investment should not be clubbed together. The purpose of insurance is to provide for security in case something happens. It is a pure risk cover. If you buy a life insurance policy, what is your primary objective saying that as an earning member of the family, if that person is not available because of unforeseen circumstances, then there is going to be a financial burden on the family because there was an earning member who is no more.
So, you want to replace yourself financially and that is your primary objective of buying an insurance policy. Now that can be fulfilled with a term insurance plan. You do not need to buy an investment oriented policy because if you buy an investment oriented policy, you will not be able to buy the adequate cover because the premiums will be higher. If you want a lower premium with maximum cover, term plan is the only alternative. Now, term plan insurance premium also is eligible for deduction under Section 80C. So, if you buy a term insurance plan and you pay the premiums, you will get a deduction under Section 80C. The government has been trying to promote financial security and encourage individuals to buy such insurance policies for the welfare of the families and for themselves and to motivate in this direction, the government says that for the premiums paid, there will be a deduction in income tax. So, look at it only from that angle. The other insurances that an individual would require in their own setup would be health insurance for sure. One needs to make sure that in case of any hospitalisation, you have adequate resources for proper treatment because the cost of medical treatment these days are skyrocketing. Probably a treatment that was costing about Rs 50,000 a few years ago would be approximately Rs 5 lakh or Rs 10 lakh today. That is how the cost of medical treatment is going up
You need to buy adequate mediclaim insurance. By adequate I mean, if you are in metros, you would definitely need Rs 10-15 lakh. If you are in non-metros, then probably a Rs 10 lakh sum insured should be good enough. But given the combinations that are available today in the form of a base policy and a super top up, a family of four can insure themselves at a very reasonable cost for a sum insured of up to Rs 50 lakh as well and the premiums that you pay not only for yourself, your spouse, your dependent children, even if the premiums that you pay for your parents are eligible for deduction under Section 80D.
As I said, club two things together, the tax saving would be a byproduct, not the main reason. So you need medical insurance. Now, if you are in the new tax regime, which is the default tax regime, there is no deduction for Section 80D but you would still go ahead and buy a cover for your family irrespective of whether or not you get tax benefits. If you get tax benefits, great, if not, it’s fine. It does not mean that you will go and buy something else. So, that is the basic approach with which you have to look for products that you need in the last few days of the financial year.
Do not get carried away and commit yourself to a policy for 10-20 years only to save tax this year and then you pay on for the next 10-20 years. I do not think that is a smart thing to do.
Obviously, you need to java your life insurance and health insurance in place and these are the first and the basic steps when we talk about planning your financial portfolio. Given the kind of explanation you gave in order to have the right kind of insurance, how can one avail tax benefit as per 80C and 80D?
Harshvardhan Roongta: There are a few conditions that you will have to fulfil. First, look at what kind of insurance should an individual with a family consider? One is, all the earning members in the family should look at buying a family term insurance. It has to be earning members of the family, because there is a dependency on that income, even if you are a single earning member family or a double income family, you need to ensure that the earning members of the family have adequate insurance.
So, term plan is one thing that you will look at. The other insurance that earning members of the family need to look at is a critical illness policy. The premiums that you pay under that policy are eligible for deduction under Section 80D.
The third that you need to look at is a personal accident policy that is disability due to an accident. In case of any accident related disability, there is a monetary benefit that comes to the insured while he or she is alive. So, that is the third insurance that you need to look at. If you are buying a disability, a personal accident policy along with your term plan, then you get a deduction under 80C. If you are buying a standalone personal accident policy from a general insurance company, then there is no specific tax benefit available. Nevertheless, you need to still buy it in that case.
The fourth insurance that you need to look at is a mediclaim. This will ensure all family members, whether earning or not, whether they are children, young children, infants, old parents, will be insured. The premiums that you pay in those policies which are the base policy and super topper, all of those premiums are eligible for deduction under Section 80D.
Now, there is a limit to this. You can pay for yourself, your spouse and dependent children and the total limit under section 80D is Rs 25,000 per annum. If you are adding your parents, rather you are paying premiums for your parents and they are not senior citizens, that is they are below the age of 60, then you have another Rs 25,000 that you can pay. So, a total of Rs 50,000 deduction can be taken.
If your parents are senior citizens and you are paying for them, then the limit increases to Rs 50,000. So, these are the limits that are available under section 80D. Of course, if you are paying those premiums, you must take the benefit of tax deduction, provided you are also filing your returns under the old tax regime.
With regards to premiums under Section 80C, the term plan insurance that I am talking about or life insurance for that matter, there is a condition that the premium should be 10% of the sum insurance. So, basically, or the other way around saying that whatever premiums you are paying, the sum insured should be 10 times of that. If you are not qualifying into that criteria, then you cannot claim deduction under section 80C. So, just be mindful of these sub-conditions which are there to fulfil before you claim the tax benefit under respective sections and then you are good to go. And these are the insurances that you should look at.
All the policies that I spoke about are pure risk covered policies, pure protection, there is no investment element to these and nothing comes back to you if nothing happens to you. So, these are pure risk covers, which are ideal for a family and to protect themselves financially.
Let us also quickly talk about having a ULIP plan and the factors that you might want to consider before putting money in. What are the tax advantages on ULIP and the factors one might want to consider. It is under 80C. You might also want to just consider ELSS instead of ULIPs?
Harshvardhan Roongta: Coming back to the point where I said that insurance is meant only for protection purposes and that should not be clubbed with any investments. ULIP is a combination of protection and investments. So, from the tax element point of view, the premiums that you pay in a ULIP policy also qualify for deduction in the Section 80C. However, there is a limit in terms of the when you receive the maturity proceeds.
Earlier the concept was that even if it is a ULIP policy and you pay as much as you wish, if you are paying more than say Rs 2.5 lakh premium, says you are paying Rs 5 lakh as premium, the maturity proceeds from an insurance policy are tax exempt under Section 10(10D). So, even if it is a ULIP and you are getting the money back, it is going to be tax free, that provision has changed and been modified to say that if your annual aggregated premium is more than Rs 2.5 lakh in a year, then the maturity proceeds are not going to be tax free.
Earlier it was tax exempt, now it is not tax exempt and that is mind you an aggregate. So, it is not that only one per policy of Rs 2.5 lakh premium. If you have three policies and all three have Rs 1 lakh premium each, you are paying Rs 3 lakh per annum. So, on an aggregated basis you are paying more than Rs 2.5 lakh in a year, so the maturity proceeds that you get on all your ULIP policies will be taxable, it will not be tax free. So, that is one part.
Now coming to the second part, I would prefer to have investments separate in an exclusive pure investment product and insurance being separate. ELSS works very well in terms of saving tax under Section 80C. So, that is one element which people should very actively consider.