Did you know? You can save tax with the right health insurance plan

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The onset of every new calendar year brings with it some “taxing times”. Salaried employees are asked by their employers to submit proofs of investments. And so, each year as March 31^st comes closer, several taxpayers rush to make last-minute purchases of tax-saving financial instruments if they haven’t been disciplined in meeting with their tax-planning investment targets throughout the year.

E-purchases

The options to choose such financial instruments include five-year fixed deposits in a bank, public provident fund, mutual funds and insurance policies, among others. Luckily for investors, the convenience of online purchases has made this process less tedious and helped them broaden the tax-planning horizon along with boosting their savings. Each of the options mentioned earlier can now be purchased with the click of a mouse, or even better, by tapping the right apps on your smartphone.

With many options available, choosing the right investment instrument to save tax lies with the individual. While one can argue on the importance each one of these mechanisms has, insurance – particularly health insurance – is one solid choice for investors. They not only help in mitigating any financial losses arising out of a medical emergency, but also help in saving or reducing the tax burden.

There are nearly 20 General Insurance companies currently operating in the country and they offer multiple products under the health insurance category.

The government, too, has understood its importance and has laid out exemptions under Section 80D of the Income Tax Act.

Ax the tax

Given the definition above, it is prudent to say that health insurance provides the right balance in ensuring that you are on your path to achieving the financial goal along with saving a good amount of taxes.

The types of insurances provided under a health cover are individual health insurance, family health cover, senior citizen health insurance plan, surgery and critical illnesses insurance cover, maternity health insurance, and personal accident insurance cover, among others.

Individuals can claim a total deduction up to Rs 25,000 for a health policy premium paid for self, spouse and children. An additional deduction can also be claimed if premiums are paid for parents as well.

It must be noted that all payments of such premiums must be made in non-cash forms such as cheques, demand drafts and net banking, among others.

In its efforts to incentivise health insurance tax benefits, the government has also widened this ambit to include preventive health check-ups as well. Taxpayers can claim a deduction of Rs 5,000 (within the Rs 25,000-limit mentioned earlier) under Section 80D of the Income Tax Act if they fall short of the limit as well.

If you choose to buy a single-premium health insurance i.e. a lump-sum, one-time premium amount has been paid in lieu of the policy, taxpayers can claim a deduction by dividing the total premium paid by the number of years for the policy. This amount per year would be subject to the limits mentioned above.

Case File

Let us understand the whole concept with an example. Consider the case of taxpayer Amit, who pays an annual health insurance premium for a family policy that includes himself, his wife and one child of Rs 23,000. He has paid Rs 3,000 for a preventive health check-up in the year under review. A health cover premium of Rs 25,000 for his mother and father, both aged 59, was also paid by him.

Here’s how this break-up would look like:

Deduction claim for self, spouse and children: Rs 25,000 (including the preventive check-up)

Deduction for parents: Rs 25,000

If the premium paid for self, spouse and children is Rs 30,000, then the maximum deduction that can be claimed is Rs 25,000. In this case, he may not be able to claim the preventive health check-up amount as it has the total deduction has already exceeded Rs 25,000.

Now, two years down the line, Amit’s parents will be 61 years old and consider a case where their annual premium amount has increased to Rs 40,000. In case of the annual premium for himself, spouse and kids has also increased to Rs 30,000. The new break-up of the deduction would be as follows:

- Deduction for self, spouse and children: Rs 25,000

- Deduction for dependant parents: Rs 40,000 (well within the limit of Rs 50,000 as the parents’ age has crossed 60)

One can see how health insurance can substantially help you save tax, while securing your finances in times of a medical emergency.

In fact, they are an addition to deductions provided under Section 80C of the Income Tax, which has deductions of up to Rs 1,50,000. If planned properly, a taxpayer can claim deductions of up to Rs 75,000 where he, spouse and children are under the age of 60, while the parents are above 60 years.

Choosing the right health insurance plan, however, must be done by considering all relevant factors. It would be better to do extensive research and compare policies offered by multiple insurers and choose the best product. If that is beyond your purview, then it would be better to consult with an insurance agent, a financial advisor or a chartered account, who would understand the risk profile and several other parameters before helping you choose one.