BOMBAY, 22 March 2004 — This is that time of the year when one gets submerged in tons of paperwork and a labyrinth of numbers and percentages. The financial year ends for the India on March 31 and now the rush is on to close the books and pay up the taxes. This is probably the busiest time for the tax consultants and financial advisers who burn the midnight oil to save precious money for their clients by ingenious ways to avoid paying taxes.
For the salaried though, there are very little options. But amongst all the current instruments available to not only save taxes but also to earn while saving, Insurance has emerged as the best tool available. Undoubtedly, given the current volatility in the stock markets and the all-time low interest rates on various saving instruments, insurance products are easily one of the safer places to invest your money in and get tax breaks too.
Life insurance is one of the most popular savings investment vehicles in India. Ironically its probably the least understood too. An insurance policy offers much more than just tax planning and investment returns. It offers you the ability to plan for unforeseen events that could affect your family’s financial problem adversely.
First things first — insurance gives protection to you and your family and that it its primary function. It is only after protection that it is an investment avenue that gives you tax sops. Currently we are focusing on tax-saving, hence one should understand the various kinds of sops available under the various sections.
Before we proceed ahead, S. Ramachandran, a tax consultant in Bombay explains that before looking at an investment option as a tax saving instrument, one should understand the difference between rebate and deduction. Tax rebate is a certain percentage of your investment amount which would be deducted from your final tax liability, depending on your income bracket. It usually is in the range of 15 percent and 20 percent. Whereas, in tax deduction, the entire amount of your investment would be deducted from your taxable income and your tax liability would be calculated on the balance.
And now that the basics have been understood, it is imperative to choose the right policy. You can put your money either in the traditional life insurance policy which would then throw up choices of endowment, whole life or term life. The other option is to go for a unit-linked insurance policy. Yet, whatever be the kind of policy that you choose, there will be a rebate under Section 88 of the Income-Tax Act (I-T Act). Also, the maturity or death benefit would be tax-free under Section 10(10D) of the I-T Act. However, these tax sops are subject to conditions of lock-in.
One has to remember that when a taxpayer discontinues a traditional life insurance policy before premium for two years has been paid, no tax rebate under Section 88 will be allowed in the year in which the policy is discontinued.
In a unit-linked insurance policy, if the terminates his policy before five years’ premiums have been paid, he stands to lose out on the tax benefits earlier claimed. So if the example above were with respect to a unit-linked policy and the policy were terminated after four years, the taxpayer would be taxed on Rs.3,000 (Rs.750 for four years) in the fifth year.
Talking about Unit Linked Insurance Plans it is imperative at this juncture for investors to know that these policies are a bit different. The premiums, after deducting charges and expenses, are invested in a fund (similar to a mutual fund), more on the lines of mutual funds coupled with a life cover.
If you opt for a unit-linked endowment policy, you can choose to invest your premiums in debt, balanced or equity funds. If you choose a debt fund, the majority of your premiums will get invested in debt securities like gilts and bonds. If you choose equity, then a major portion of your premiums will be invested in the equity market. Presently, only a few companies like LIC, ICICI Pru Life, Birla Sun Life and Aviva offer unit-linked insurance products. UTI offers UTI-ULIP.
Coming back to the tax angle, tax consultants say that single-premium policies are not a very good idea when saving for tax. This is because when the premium exceeds 20 percent of the sum assured, the benefit for rebate is restricted to 20 percent of the sum assured thus not giving the desired tax benefit.
In case of child benefit policies, tax benefits are available in the form of rebate. Here, the premium paid attracts rebate under Section 88. Maturity or death is tax free.
Pension benefit policies offer tax deduction under Section 80CCC of the I-T Act. Annual premium, up to a maximum of Rs.10,000 would be deducted from the taxable income.
At the moment Indian investors no longer have to depend solely on the government owned Life Insurance Corporation of India. There is now a plethora of companies, international that too, to choose from. AMP Sanmar, Allianz Bajaj Life Insurance, Aviva Life Insurance, Birla Sun Life Insurance, HDFC Standard, ICICI Prudential, ING Vyasa, LIC, Max New York Life, MetLife India Insurance, Om Kotak Mahindra Life, Tata AIG, SBI Life are some of the insurers one can choose from.
