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How Can An Endowment Plan Help During Taxation?

By Author: sammi maheshwari
Total Articles: 8

Abhishek is a 30-year-old salaried employee. He wishes to purchase a life insurance policy to safeguard his family. He also wants to plan for his retirement and future needs. Mr. Mehta, his trusted financial advisor, suggests that an endowment policy is an investment tool which can satisfy his needs.

What is an endowment policy?

An endowment policy provides the dual benefits of life cover and investment. At the end of the maturity period, you are returned the premium you've paid through the years, along with profit on your investments. And in case of your untimely passing away before maturity, your family is taken care of through the claim amount. Noticeably, endowment plans are more expensive than term plans, but also give returns, which terms plans don't. If you're looking to buy an endowment plan, remember that it may be unit-linked, i.e. your funds are invested in the equity market.
Further, the highlight of an endowment plan is tax saving. Tax rates in India are comparatively higher than other nations. Thus, tax planning becomes essential. Investment in endowment policy can help save tax.
Under section 10(10D) of the Income Tax Act, any amount received on maturity of endowment policy or in case of death of insured is not taxable. However, this is subject to the premium being less than or equal to 10% of the sum assured. In case if the insured suffers from any severe disease or disability, then the limit is increased to 15%.
The sum received is not subject to TDS, i.e. tax is not deducted at source and the entire amount is available to the insured or beneficiary.
E.g. Kunal buys an insurance policy of Rs 1,00,000 and an annual premium of Rs. 8,000. On maturity, he receives the sum assured of Rs. 100,000 and a bonus of Rs. 50,000. In this case, Rs. 150,000 is not taxable. However, if the premium was Rs 12,000 then the entire receipt of Rs. 150,000 becomes taxable.
That's not it! Investing in endowment plans is eligible for tax deduction. This means that premium paid made in an endowment policy can be reduced from the total income that is taxable. Under section 80C of the Income Tax Act, investment in an endowment plan can be claimed as a deduction provided that the premium is less than or equal to 10% of the sum assured, which is also increased to 15% under certain conditions.
Kunal can claim a deduction of Rs. 8,000 every year, as long as he pays the premium. Thus, endowment policies have multiple benefits of life cover, investment and tax saving.

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