Deductions under 80C: Life Insurance

The first article under the Income Tax series was about Income Tax Slabs. Do go read it if you have difficulty calculating your taxes and the different slabs.

There are various sections under which we can claim tax deductions. And each has it’s own limits and uses. 80C is the most popular section under which people claim tax deductions. Even though I have written in brief about this section, it was in 2013 and a lot of things have changed since then.

Under this section 80C, Rs.1.5 Lakhs can be claimed for tax deductions. Money invested under this section enjoy tax deductions. They also have a long lock-in period attached to it.

There are other types of expenses that can also be claimed under 80 C and in this article I will explain in depth about what I consider to be the most important one – Life Insurance.

Life Insurance Policies are a must if you have dependents – spouse, children, parents, etc. It is double important if you have liabilities like home loan, car loan. The Insurance Policy makes sure that your dependents can maintain the same life style as they are currently enjoying even after your death.

There are lot of Insurance agents who sell policies without trying to mention the words “DEATH“. Death is the one certainty that can happen to anyone at any time. It is very important to not mince words and ensure that your dependents are well protected.

Life Insurance is needed for everyone who earns money in the family. Without their money, if you can’t lead the same lifestyle, then get that person insured.

  • If you are the primary bread winner, get insurance.
  • If your spouse also earns money, get insurance for him/her.
  • If your children are still in school or college – don’t get insurance for them.

There are many insurance providers who sell insurance policies in the name of Children Savings policy.
These are just emotional words to get your money.

When your child earns his own money, he can get himself insured. Till then, it is not needed.

The only difference is if you child earns the money in your family as an artiste and you are dependent on him/her, then you need to get them insured.

What Life Insurance Policy to buy?

Always buy a Term Insurance policy.
End of discussion.
Go on to the next section.

Ok. You are still here? Want to know why I said Term Insurance?

Lets see the dictionary definition of Insurance

Insurance
an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.

See how the dictionary definition doesn’t have any word called investment or savings? Term insurance is the only true life insurance policy that strictly follows the dictionary definition.

You should never mix insurance and investment. Both are completely different and should remain separate. Since term insurance is just a pure insurance product, you get more value for your money.

How much Insurance do you need?

Generally speaking you should be insured for 10x to 12x your annual income + any liabilities (loans) you have.

So if your annual income is Rs.10 lakhs and you don’t have any home loan, get a term insurance for minimum 1 crore.

If you have a home loan of Rs.50 lakhs, up your term insurance to Rs.1.5 crores.

Which Term Insurance to choose?

There are many providers to choose from and it is easy to buy a term insurance online by spending less than 30 mins. All Insurance Providers are regulated by the IRDA, so you can choose any provider. So it makes sense to choose the provider who gives the lowest price and has the highest settlement ratio.

But you should make sure that you fill in your insurance form by yourself and fill it in truthfully. The premium you pay depends on your health conditions (smoker/diabetes/heart condition/etc). If you fill it in with wrong details, there will complications when the policy is claimed. And the only time the policy is going to get claimed is when you are not alive – leading to unnecessary complications for your near and dear.

So always fill in the form properly and get the mandatory medical test to avoid complications.

Now that you have covered your dependents for cases when you might not be alive and also gotten tax deductions for the premium paid, next is to invest the remaining money for your future and also get tax deductions for that.

The next article is about my most preferred tax efficient investing method – ELSS funds. Do give me your email address below and I will send it to you as soon as I publish.

Income Tax Slabs

Income Tax Slabs – “Slabs”, get it?

Taxes are an integral component of any country’s budget. You are liable to pay tax even if you earn a single Rupee in India (whether it is earned legally or illegally). I am starting a new series of articles on Income Tax for individuals. This the first of the series and we will try to understand why we need to pay income tax and the different income tax slabs.

Why does the government need taxes?

The government earns most of it’s income from the taxes paid by companies and individuals. This money earned is used for the benefit of the people by building better infrastructure, welfare schemes, education institutions, etc.

Income Tax Slabs

I am assuming you are an individual who earns a monthly salary or has a small business. We are going to concentrate on income taxes and there are multiple levels of tax rates.

The income tax slabs I have mentioned here are for the financial year 2016-17. For FY 2017-18, the income tax slabs are a bit different – where the 10% slab has been decreased to 5%.

Less than 60 years old
Income Range Tax Rate
Income up to Rs. 2,50,000 No Tax
Income from Rs. 2,50,000 to Rs. 5,00,000 10%
Income from Rs. 5,00,000 to Rs.10,00,000 20%
Income more than Rs.10,00,000 30%
60 years or more upto 80 years
Income Range Tax Rate
Income up to Rs. 3,00,000 No Tax
Income from Rs. 3,00,000 to Rs. 5,00,000 10%
Income from Rs. 5,00,000 to Rs.10,00,000 20%
Income more than Rs.10,00,000 30%
80 years old or more
Income Range Tax Rate
Income up to Rs. 5,00,000 No Tax
Income from Rs. 5,00,000 to Rs.10,00,000 20%
Income more than Rs.10,00,000 30%

Note: Surcharge of 12% of income tax is applied if your total income exceeds Rs.1 crore. You also pay a cess of 3% on total income tax + surcharge

Calculating taxes

Lets assume you have a total taxable income of Rs 8,00,000. This income has been calculated by including income from all sources such as salary, rental income and interest income. Now lets calculate how much taxes are due for FY 2016-17 (AY 2017-18).

Tax Calculations for FY 2016-17
Income Slab Tax Rate Tax to be Paid
Income up to Rs. 2,50,000 No Tax Rs.0
Income from Rs. 2,50,000 to Rs. 5,00,000 10% (Rs. 5,00,000 to Rs.2,50,000) Rs.25,000
Income from Rs. 5,00,000 to Rs.10,00,000 20% (Rs.8,00,000 to Rs.5,00,000) Rs. 60,000
Income more than Rs.10,00,000 30% (nil) Rs.0
Tax Rs.85,000
Cess 3% of Rs.85,000 Rs.2,550
Total Tax payable in FY 2016-17 Rs. 87,550

Now for the same salary for FY 2017-18, since the 10% tax has been reduced to 5%, lets see how much difference it makes?

Tax Calculations for FY 2016-17
Income Slab Tax Rate Tax to be Paid
Income up to Rs. 2,50,000 No Tax Rs.0
Income from Rs. 2,50,000 to Rs. 5,00,000 5% (Rs. 5,00,000 to Rs.2,50,000) Rs.12,500
Income from Rs. 5,00,000 to Rs.10,00,000 20% (Rs.8,00,000 to Rs.5,00,000) Rs. 60,000
Income more than Rs.10,00,000 30% (nil) Rs.0
Tax Rs.72,500
Cess 3% of Rs.72,500 Rs.2,175
Total Tax payable in FY 2016-17 Rs. 74,675

Not a huge saving compared to the current financial year. But still, so much money is being paid as tax? No way! So much of your hard-earned money is being paid as taxes.

Tax Deductions

Before calculating the taxes, you should also know that the government does provide certain provisions using which one can lower their taxes paid. These are called tax deductions and they are legal methods on paying lower taxes. The deduction one is eligible for depends on a number of factors, with different limits set for different purposes.

Depending on the type of tax deduction you claim, the amount of deduction varies. There are sections of the tax law where you can claim tax deduction for amounts spent in tuition fees, medical expenses and charitable contributions.  You can also invest in various schemes such as life insurance plans, retirement savings schemes, and national savings schemes etc., to get tax deductions. By providing these deductions the government is incentivizing the citizens to save more money and spend it on activities that has social benefits.

In the next articles, we will look into the different deductions that are possible to save on tax. The first of which is the most popular section 80C.