Insurance As A Tax Saving Tool

PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS
CHAPTER-1 INTRODUCTION
Insurance
Insurance is the equitable transfer of the risk of a loss, from one entity to another in
exchange for payment. It is a form of risk management primarily used to hedge against
the risk of a contingent, uncertain loss.
An insurer, or insurance carrier, is a company selling the insurance; the insured, or

policyholder, is the person or entity buying the insurance policy. The amount to be
charged for a certain amount of insurance coverage is called the premium. Risk
management, the practice of appraising and controlling risk, has evolved as a discrete
field of study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small
loss in the form of payment to the insurer in exchange for the insurer's promise to
compensate (indemnify) the insured in the case of a financial (personal) loss. The insured
receives a contract, called the insurance policy, which details the conditions and
circumstances under which the insured will be financially compensated.
Principles
Insurance involves pooling funds from many insured entities (known as exposures) to pay
for the losses that some may incur. The insured entities are therefore protected from risk
for a fee, with the fee being dependent upon the frequency and severity of the event
occurring. In order to be insurable, the risk insured against must meet certain
characteristics in order to be an insurable risk. Insurance is a commercial enterprise and a
major part of the financial services industry, but individual entities can also self-insure
through saving money for possible future losses.
History of insurance
History of insurance refers to the development of a modern business

in insurance against risks, especially regarding ships, cargo, and buildings ("property"
INSURANCE AS A TAX SAVING TOOL Page 1

and "fire"), death ("life" insurance), automobile accidents ("auto"), and the cost of
medical treatment (health insurance).
The industry has been profitable and has provided attractive employment
opportunities for white collar workers. It helps eliminate risks (as when fire insurance
companies demand safe practices and the availability of fire stations and hydrants),
spreads risks from the individual or single company to the larger community, and
provides an important source of long-term finance for both the public and private
sectors.
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
( Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kautilya ( Arthasastra ). The
writings talk in terms of pooling of resources that could be re-distributed in times of
calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor
to modern day insurance. Ancient Indian history has preserved the earliest traces of
insurance in the form of marine trade loans and carriers contracts. Insurance in India
has evolved over time heavily drawing from other countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of
the Oriental Life Insurance Company in Calcutta. This Company however failed in
1834. In 1829, the Madras Equitable had begun transacting life insurance business in
the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in
the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental
(1874) and Empire of India (1897) were started in the Bombay Residency. This era,
however, was dominated by foreign insurance offices which did good business in
India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from the foreign
companies.
Tax
A tax (from the Latin taxo; "I estimate") is a financial charge or other levy imposed upon
a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state

such that failure to pay is punishable by law. Taxes are also imposed by many
administrative divisions. Taxes consist of direct or indirect taxes and may be paid in
money or as its labour equivalent.
According to Black's Law Dictionary, a tax is a "pecuniary burden laid upon individuals
or property owners to support the government. A payment exacted by legislative
authority." It "is not a voluntary payment or donation, but an enforced contribution,
exacted pursuant to legislative authority" and is any contribution imposed by
government, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom,
excise, subsidy, aid, supply, or other name.
History
The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in
the first dynasty of the Old Kingdom. The earliest and most widespread form of taxation
was the corve and tithe. The corve was forced labour provided to the state by peasants
too poor to pay other forms of taxation (labour in ancient Egyptian is a synonym for
taxes). Records from the time document that the pharaoh would conduct a biennial tour
of the kingdom, collecting tithes from the people. Other records are granary receipts on
limestone flakes and papyrus. Early taxation is also described in the Bible. In Genesis
(chapter 47, verse 24 - the New International Version), it states "But when the crop comes
in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields
and as food for yourselves and your households and your children". Joseph was telling
the people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share
(20%) of the crop was the tax.
Later, in the Persian Empire, a regulated and sustainable tax system was introduced by
Darius I the Great in 500 BC; the Persian system of taxation was tailored to each Satrapy
(the area ruled by a Satrap or provincial governor). At differing times, there were between
20 and 30 Satrapies in the Empire and each was assessed according to its supposed
productivity. It was the responsibility of the Satrap to collect the due amount and to send
it to the emperor, after deducting his expenses (the expenses and the power of deciding
precisely how and from whom to raise the money in the province, offer maximum
opportunity for rich pickings). The quantities demanded from the various provinces gave

a vivid picture of their economic potential. For instance, Babylon was assessed for the
highest amount and for a startling mixture of commodities; 1,000 silver talents and four
months supply of food for the army. India, a province fabled for its gold, was to supply
gold dust equal in value to the very large amount of 4,680 silver talents. Egypt was
known for the wealth of its crops; it was to be the granary of the Persian Empire (and,
later, of the Roman Empire) and was required to provide 120,000 measures of grain in
addition to 700 talents of silver. This was exclusively a tax levied on subject peoples.
Persians and Medes paid no tax, but, they were liable at any time to serve in the army.
The Rosetta Stone, a tax concession issued by Ptolemy V in 196 BC and written in three
languages "led to the most famous decipherment in historythe cracking of
hieroglyphics".
In India, Islamic rulers imposed jizya (a poll tax on non-Muslims) starting in the 11th
century. It was abolished by Akbar.
Heads of Income
The total income of a person is segregated into five heads:-
Income from Salary

Income from house property
Income from business or profession
Capital Gain and
Income from other sources
Income from Salary
All income received as salary under Employer-Employee relationship is taxed under

this head, on due or receipt basis, whichever arises earlier. Employers must withhold

tax compulsorily (subject to Section 192), if income exceeds minimum exemption

limit, as Tax Deducted at Source (TDS), and provide their employees with a Form
16 which shows the tax deductions and net paid income.
All other Perquisites are to be calculated according to specified provision and rules
for each. Only two deductions are allowed under Section 16, viz. Professional Tax
and Entertainment Allowance (the latter only available for specified government
employees).
Income from House property
Income under this head is taxable if the assessee is the owner of a property consisting
of building or land appurtenant thereto and is not used by him for his business or
professional purpose. An individual or an Hindu Undivided Family (HUF) is eligible
to claim any one property as Self-occupied if it is used for own or family's residential
purpose. In that case, the Net Annual Value (as explained below) will be nil. Such a
benefit can only be claimed for one house property. However, the individual (or
HUF) will still be entitled to claim Interest on borrowed capital as deduction under
section 24, subject to some conditions. In the case of a self occupied house deduction
on account of interest on borrowed capital is subject to a maximum limit of
Rs.1,50,000 (if loan is taken on or after 1 April 1999 and construction is completed
within 3 years) and Rs.30,000 (if the loan is taken before 1 April 1999). For let-out
property, all interest is deductible, with no upper limits. The balance is added to
taxable income.
The computation of income from let-out property is as under:-
Gross Annual Value (GAV) xxxx
Less: Municipal Taxes paid (xxx)
Net Annual Value (NAV) xxxx
Less: Deductions under (xxx)

section 24
Income from House property xxxx
The GAV is higher of Annual Letting Value (ALV) and Actual rent
received/receivable during the year. The ALV is higher of fair rent and
municipal value, but restricted to standard rent fixed by Rent Control Act.
Only two deductions are allowed under this heaad by virtue of section 24, viz.,
30% of Net annual value as Standard deduction
Interest on capital borrowed for the purpose of acquisition, construction,
repairs, renewals or reconstruction of property (subject to certain provisions).
Income from Business or Profession
The income referred to in section 28, i.e., the incomes chargeable as "Income from
Business or Profession" shall be computed in accordance with the provisions
contained in sections 30 to 43D. However, there are few more sections under this
Chapter, viz., Sections 44 to 44DA (except sections 44AA, 44AB & 44C), which
contain the computation completely within itself. Section 44C is a disallowance
provision in the case non-residents. Section 44 (AA) deals with maintenance of books
and section 44 (AB) deals with audit of accounts.
In summary, the sections relating to computation of business income can be grouped

as under: -
Sections 30 to 37 cover expenses which are expressly

Specific deductions
allowed as deduction while computing business income.
Specific disallowance Sections 40, 40A and 43B cover inadmissible expenses.

Deemed Incomes Sections 33AB, 33ABA, 33AC, 35A, 35ABB, 41.
Sections 42, 43C, 43D, 44, 44A, 44B, 44BB, 44BBA,

Special provisions
44BBB, 44DA, 44DB.
Presumptive Income Sections 44AD, 44AE.
The computation of income under the head "Profits and Gains of Business or
Profession" depends on the particulars and information available.[5]
If regular books of accounts are not maintained, then the computation would be as
under: -
Income (including Deemed Incomes) chargeable as income under this head xxx
Less: Expenses deductible (net of disallowances) under this head (xx)
Income from Capital Gains
Full value of consideration1 xxx
Less: Cost of acquisition (xx)
Less: Cost of improvement (xx)
Less: Expenditure pertaining to

(xx)
transfer incurred
INSURANCE by theTOOL
AS A TAX SAVING transferor Page 7
Transfer of capital assets results in capital gains. A Capital asset is defined under
section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as
real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include
some items like any stock-in-trade for businesses and personal effects. Transfer has
been defined under section 2(47) to include sale, exchange, relinquishment of
asset extinguishment of rights in an asset, etc. Certain transactions are not regarded as
'Transfer' under section 47.
Computation of Capital Gains:-
In case of transfer of land or building, if sale consideration is less than the

stamp duty valuation, then such stamp duty value shall be taken as full value of
consideration by virtue of Section 50C. The transferor is entitled to challenge
the stamp duty valuation before the Assessing Officer.
Cost of acquisition & cost of improvement shall be indexed in case the capital
asset is long term.
For tax purposes, there are two types of capital assets: Long term and short term.
Transfer of long term assets gives rise to long term capital gains. The benefit of
indexation is available only for long term capital assets. If the period of holding is
more than 36 months, the capital asset is long term, otherwise it is short term.
However, in the below mentioned cases, the capital asset held for more than 12
months will be treated as long term:-
Any share in any company
Government securities
Listed debentures
Units of UTI or mutual fund, and
Zero-coupon bond

Also, in certain cases, indexation benefit is not be available even though the capital
asset is long term. Such cases include depreciable asset (Section 50), Slump Sale
(Section 50B), Bonds/debentures (other than capital indexed bonds) and certain other
express provisions in the Act. There are different scheme of taxation of long term
capital gains. These are:
1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains on
shares or securities or mutual funds on which Securities Transaction Tax (STT) has
been deducted and paid, no tax is payable. STT has been applied on all stock market
transactions since October 2004 but does not apply to off-market transactions and
company buybacks; therefore, the higher capital gains taxes will apply to such
transactions where STT is not paid.
2. In case of other shares and securities, person has an option to either index
costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains.
The cost inflation index rates are released by the I-T department each year.
3. In case of all other long term capital gains, indexation benefit is available
and tax rate is 20%.
All capital gains that are not long term are short term capital gains, which are taxed
as such:
Under section 111A, for shares or mutual funds where STT is paid, tax rate
is 10% from Assessment Year (AY) 2005-06 as per Finance Act 2004. With effect
from AY 2009-10 the tax rate is 15%.
In all other cases, it is part of gross total income and normal tax rate is
applicable.
For companies abroad, the tax liability is 20% of such gains suitably indexed (since
STT is not paid).
Besides exemptions under section 10(33), 10(37) & 10(38) certain specific
exemptions are available under section 54, 54B, 54D, 54EC, 54F, 54G & 54GA.
Income from Other Sources

This is a residual head; under this head income which does not meet criteria to go to
other heads is taxed. There are also some specific incomes which are to be always
taxed under this head.
1. Income by way of Dividends.
2. Income from horse races/lotteries.
3. Employees' contribution towards staff welfare scheme.
4. Interest on securities (debentures, Government securities and bonds).
5. Any amount received from keyman insurance policy as donation.
6. Gifts (subject to certain conditions and exemptions).
7. Interest on compensation/enhanced compensation.
CHAPTER-2 Life insurance

Life insurance is a contract between an insured (insurance policy holder) and
an insurer, where the insurer promises to pay a designated beneficiary a sum of
money (the "benefits") upon the death of the insured person. Depending on the
contract, other events such as terminal illness or critical illness may also trigger
payment. The policy holder typically pays a premium, either regularly or as a lump

sum. Other expenses (such as funeral expenses) are also sometimes included in the
benefits.
The advantage for the policy owner is "peace of mind", in knowing that the death of
the insured person will not result in financial hardship for loved ones and lenders.
It is possible for life insurance policy payouts to be made in order to help supplement
retirement benefits; however, it should be carefully considered throughout the design
and funding of the policy itself.
Life policies are legal contracts and the terms of the contract describe the limitations
of the insured events. Specific exclusions are often written into the contract to limit
the liability of the insurer; common examples are claims relating to suicide, fraud,
war, riot and civil commotion.
Life-based contracts tend to fall into two major categories:
Protection policies designed to provide a benefit in the event of specified

event, typically a lump sum payment. A common form of this design is term
insurance.
Investment policies where the main objective is to facilitate the growth of

capital by regular or single premiums. Common forms (in the US) are whole
life, universal life and variable life policies.

History of life insurance
Insurance began as a way of reducing the risk to traders, as early as 2000 BC in

China and 1750 BC in Babylon. Life insurance dates to ancient Rome; "burial clubs"
covered the cost of members' funeral expenses and assisted survivors financially.
Modern life insurance originated in 17th century England, originally as insurance for
traders. Merchants, ship owners and underwriters met to discuss deals at Lloyd's
Coffee House, predecessor to the famous Lloyd's of London. The first society to sell
life insurance was the Amicable Society for a Perpetual Assurance Office.
The first insurance company in the United States was formed in Charleston, South
Carolina in 1732, but it provided only fire insurance. The sale of life insurance in the
U.S. began in the late 1760s. The Presbyterian Synods in Philadelphia and New
York created the Corporation for Relief of Poor and Distressed Widows and Children
of Presbyterian Ministers in 1759; Episcopalian priests organized a similar fund in
1769. Between 1787 and 1837 more than two dozen life insurance companies were
started, but fewer than half a dozen survived.
Market trends

Stranger originated
Stranger Originated Life Insurance or STOLI is a life insurance policy that is held or
financed by a person who has no relationship to the insured person. Generally, the
purpose of life insurance is to provide peace of mind by assuring that financial loss or
hardship will be alleviated in the event of the insured person's death. STOLI has often
been used as an investment technique whereby investors will encourage someone
(usually an elderly person) to purchase life insurance and name the investors as the
beneficiary of the policy. This undermines the primary purpose of life insurance, as
the investors would incur no financial loss should the insured person die. In some
jurisdictions, there are laws to discourage or prevent STOLI.
Criticism
Although some aspects of the application process (such as underwriting and insurable
interest provisions) make it difficult, life insurance policies have been used to
facilitate exploitation and fraud. In the case of life insurance, there is a possible
motive to purchase a life insurance policy, particularly if the face value is substantial,
and then murder the insured.
The television series Forensic Files has included episodes that feature this scenario.
There was also a documented case in 2006, where two elderly women were accused
of taking in homeless men and assisting them. As part of their assistance, they took
out life insurance for the men. After the contestability period ended on the policies,
the women are alleged to have had the men killed via hit-and-run car crashes.
Recently, viatical settlements have created problems for life insurance providers. A
viatical settlement involves the purchase of a life insurance policy from an elderly or
terminally ill policy holder. The policy holder sells the policy (including the right to
name the beneficiary) to a purchaser for a price discounted from the policy value. The
seller has cash in hand, and the purchaser will realize a profit when the seller dies and
the proceeds are delivered to the purchaser. In the meantime, the purchaser continues
to pay the premiums. Although both parties have reached an agreeable settlement,
insurers are troubled by this trend. Insurers calculate their rates with the assumption
that a certain portion of policy holders will seek to redeem the cash value of their
insurance policies before death. They also expect that a certain portion will stop
paying premiums and forfeit their policies. However, viatical settlements ensure that

such policies will with absolute certainty be paid out. Some purchasers, in order to
take advantage of the potentially large profits, have even actively sought to collude
with uninsured elderly and terminally ill patients, and created policies that would
have not otherwise been purchased. These policies are guaranteed losses from the
insurers' perspective.
CHAPTER-3 Types of life insurance policies

The life insurance policies are of many types. Life insurance products come in a
variety of offerings catering to the investment needs and objectives of different kinds
of investors. Following is the list of broad categories of life insurance products:
(1) Whole life Policy:
Under this policy premiums are paid throughout life and the sum insured becomes
payable only at the death of the insured. The policy remains in force throughout the
life of the assured and he continues to pay the premium till his death. This is the
cheapest policy as the premium till his death. This is the cheapest policy as the
premium charged is the lowest under this policy. This is also known as ordinary life
policy. This policy is suitable to persons who want to provide for payment of estate
duty, make bequeathments for charitable purposes and to provide for their families
after their death.
(2) Limited payment life policy:
In the case of whole life policy there is one disadvantage in that the assured must
continue to pay the premium even during his old age when he is no more employed.
Under the limited payment life policy premiums are payable for a selected number of
years or until death, if, earlier. The assured knows how much he will be required to
payable only at the how long he lives. The sum insured becomes payable only at the
how long he lives. The sum insured becomes payable only at the death of the insured.
It is a suitable policy to meet the family needs.
(3) Endowment policy:
It runs only for a limited period or up to a particular age. Under this policy the sum
assured becomes payable if the assured reaches a particular age or after the expiry of
a fixed period called the endowment period or at the death of the assured whichever
is earlier. The premium under this policy is to be paid up to the maturity of the policy,
i.e., the time when the policy becomes payable. Premium is naturally a little higher in
the case of this policy than the whole life policy. This is a very popular policy these
days as it serves the dual purpose of family and ole age pension.
(4) Double endowment policy:

Under this policy the insurer agrees to pay to the assured double the amount of the
insured sum if he lives on beyond the date of maturity of the policy. This policy is
suitable for persons with physical disability who are otherwise not acceptable for
other classes of assurance at the normal tabular rates. Premiums are to be paid for a
selected term of years or until death, if earlier.
(5) Joint Life Policy:
This policy covers the risk on two lives and is generally available to partners in
business. Policies are however, issued on the lives of husband and wife under
specified circumstances. Sum assured becomes payable at the end of the selected
term or on the death of either of the two lives assured, if earlier.
(6) With or without profit policies:
Under the with profit or participating policies, the policy holder is allowed a share
in the profits of the corporation in the form of bonus and it is added to the total sum
assured and paid at the time of maturity of the policy. In the case of without profit or
non-participating policies, no such profit is allowed. Premium in the first case is
higher and is lower in the later case.
(7) Convertible whole life policy:
This policy initially provides maximum insurance protection at minimum cost and
offers a flexible contract which can be altered at the end of five years from the
commencement of the policy to endowment insurance.
(8) Convertible term assurance policy:
This policy meets the needs of those who are initially unable to pay the larger
premium required for a whole life or endowment assurance policy but hope to be able
to do so within a few years. It would also enable such persons to take final decision at
a later date about the plan suitable for their future needs.
(9) Fixed term (marriage) Endowment policy & education annuity policy:
It is a policy suitable for making provisions for the marriage or education of children.
Premiums are payable for a selected term or till prior death. The benefits are payable
for selected term or till prior death. The benefits are payable only at the end of
selected term. In case of the marriage endowment, the sum assured is paid in lump
sum, but in case of the educational annuity, it is paid in equal half-yearly installments
over a period of five years.
(10) Annuities:
It is a policy under which the insured amount is payable to the assured by monthly or
annual installments after he attains a certain age. The assured may pay the premium
regularly over a certain period or he may pay the premium regularly over a certain
period or he may pay a lump sum of money at the outset. These policies are useful to
persons who wish to provide a regular income for themselves and their dependants.
(11) Sinking fund policy:
Such a policy is taken with a view to providing for the payment of liability or
replacement of an asset.
(12) Multipurpose policy:
This policy meets several insurance needs of a person like provision for himself in
old age, income for his family and provision for the education, marriage or the start
in life of his children. It gives maximum protection to the beneficiaries in the event of
the early death of the assured, as it provides:
i) Regular monthly income during the unexpired term;
ii) Additional monthly income for a period of two years from the date of death;
iii) Payment of a part of the sum assured on death and
iv) Payment of the balance sum assured at the end of the selected period
CHAPTER-4 DEDUCTIONS WITH RESPECT TO TAX

Under Section 80C of the Income Tax Act of 1961, a taxpayer is allowed certain
deductions that allow him to lower his tax liability against his taxable income.
These deductions are as per Budget 2016 and are applicable for AY 2014-15, AY
2015-16, AY 2016-17, and AY 2017-18.
Tax deductions are offered for the taxpayer to save tax and to lower the amount of
tax he needs to pay. The amount varies with the type of deductions you are
claiming. It could be for medical expenses, tuition fees, or donations!
These tax exemptions are offered by the Government as a type of encouragement

to individuals and corporations to provide for social causes.
What Tax Deductions Fall Under Section 80C of Income Tax Act:
An individual and HUFs can claim deductions under Section 80C on payments
made to the following:
Premium for Life Insurance for self, spouse, or children
Deferred Annuities payable by self and the Government
Contribution towards PPF
Contribution towards PFs operated by the Central Government.
Contribution towards a Recognized PF.
Contribution towards a Superannuation Fund.
Subscription for a Government Deposit or Security.
Subscription for Saving Certificates.
Subscription to ULIP, 1971.
Contribution towards ULIP of LIC Mutual Fund.
Insurance companys Annuity Plans including LIC.
Subscription to Notified units of Mutual Fund.

Contribution to the Pension Fund of Notified units of Mutual Fund.
National Housing Banks Pension Fund.
Subscribing to the Deposit Scheme of a Public Sector companies allocating long-

term financing for housing.
Tuition fees for a maximum of 2 children studying in India.
Repayment of housing loan taken for a residential property.
Subscription to Mutual Funds units recommended by Central Board of Direct

Taxes.
An FD from a scheduled bank with a minimum tenure of 5 years.
NABARD notified bonds.
Contributions to Senior Citizens Saving Scheme.
Tax Saving 5 Year FD.
Rs.150,000 is the maximum deduction that can be claimed under Section 80C and
all its subsections combined.
Section 80D Deductions
Subsections of Section 80C, Income Tax Act, 1961
Subsections were created to give clarity to the taxpayers regarding which

deductions they are eligible for.
1: Section 80CCC
Only an individual can claim a maximum of Rs.150,000 as tax deductions under

this section against payments made towards Pension Funds.
2. Section 80CCD
An individual taxpayer can claim a deduction under this section if he and his
company make contributions to Central Government certified pension schemes.

Both the amounts are eligible for a tax deduction if the amount does not exceed
10% of the individual taxpayers salary.
3. Section 80CCF
Tax deduction under this section can be claimed by both an individual and HUFs
on investments made in Government notified long-term Infrastructure Bonds. The
maximum deduction of Rs.20, 000 can be claimed under this section.
4. Section 80CCG
Under this section only specified individuals can claim a maximum benefit of
Rs.25,000 against investments made in Government notified Equity Schemes.
Deduction claimed cannot be more than 50% of the invested amount.
Popular Schemes Eligible For Deductions Under Section 80C
Section 80C deductions are offered to investments made in a variety of

instruments. Several of these are more popular than others because of different
reasons. The government too promotes a few as tax saving instruments to
encourage individuals to make investments.
Income Tax Deduction on Investment in PPF and Provident Funds
An individual can claim deductions for deposits made in PPF accounts in the name
of self, spouse, and children even if major.
HUFs can claim the deduction under the section for deposits made for any member
of the family.
The maximum deduction allowed is Rs.100,000 for AY 2014-15 and Rs.150,000

for AY 2015-16, AY 2016-17, and AY 2017-18.
Investments in PPF earn fixed annual compound interest. For FY 2016-17, an

interest of 8.1% has been declared by the Ministry of Finance.
PPF has a 15-year tenure, from which the amount can not be withdrawn
prematurely.
Partial withdrawals equivalent to the total of the last three years contribution to the
PPF account is allowed, that too after completion of a set number of years.
You can also take a loan against the total available amount in the account.
Contribution to EPF not exceeding Rs.150,000 too earns tax benefit under Section
80C. 12% of the salary is invested in EPF. Currently, it is earning an interest rate of
8.8%.!
Limit on Amount of Deduction
Deduction under Section 80C is available upto a maximum of Rs.100,000,

the overall limit provided under the Income-tax Act for payments/deposits specified
under Section 80C, 80CCC and 80CCD (contribution to pension scheme of Central
Government) in aggregate.
* "Actual Capital Sum Assured in relation to a life insurance policy shall mean the
minimum amount assured under the policy on happening of the insured event at any
time during the term of the policy, not taking into account -
(i) the value of any premium agreed to be returned; or
(ii)any benefit by way of bonus or otherwise over and above the sum actually
assured, which is to be or may be received under the policy by any person
"Please note that tax laws and benefits under the said laws are subject to change.
Please consult your tax advisor for the latest tax benefits on Life Insurance plans."
Health Insurance Premium

The annual deduction under sec 80D is of Rs. 15,000/- from taxable income for
payment of Health Insurance premium for self, spouse, children. For senior
citizens, the maximum deduction is Rs. 20,000/-.
Pension Funds
The aggregate deduction under Sec. 80C and the contributions to annuity plans or
pension funds under Sec. 80CCC or Sec. 80CCD should not exceed Rs. 1 lakh.

The maximum amount deductible under section 80C is Rs. 1,00,000. Also the
total amount of deductions under sections 80C, 80CCC and 80CCD is Rs.
1,00,000.
Surrender value
Surrender value received is taxable in the year of receipt in the hands of the
assessee or nominee

CHAPTER-5 INCOME-TAX AND TAX BENEFITS FROM

LIFE INSURANCE
Income tax slab for individual tax payers & HUF (less than 60 years old) (both
men & women)
Income Tax Slab Tax Rate
Income up to Rs. 2,50,000* No Tax
Income from Rs. 2,50,000 Rs.

5%
5,00,000
Income from Rs. 5,00,000

20%
10,00,000
Income more than Rs. 10,00,000 30%
Surcharge: 10% of income tax, where total income is between

Rs. 50 lakhs and Rs.1 crore. 15% of income tax, where total
income exceeds Rs. 1 crore.
Cess: 3% on total of income tax + surcharge.
* Income upto Rs. 2,50,000 is exempt from tax if you are less
than 60 years old.

Income tax slab for individual tax payers & HUF (60 years old or more but
less than 80 years old) (both men & women)
Income up to Rs.
No Tax
3,00,000*

5%
Rs. 5,00,000

20%
10,00,000
Income more than Rs.

30%
10,00,000
Surcharge: 10% of income tax, where total income is between Rs. 50

lakhs and Rs.1 crore. 15% of income tax, where total income exceeds
Rs.1 crore.
* Income up to Rs. 3,00,000 is exempt from tax if you are more than
60 years but less than 80 years of age.

Income tax slab for super senior citizens (80 years old or more) (both men &
women)
Income up to Rs.
No Tax
2,50,000*
Income up to Rs.
No Tax
5,00,000*

20%
10,00,000
Income more than Rs.

30%
10,00,000
Surcharge: 10% of income tax, where total income is between Rs. 50

lakhs and Rs.1 crore. 15% of income tax, where total income exceeds
Rs.1 crore.
*Income up to Rs. 5,00,000 is exempt from tax if you are more than
80 years old.

CHAPTER-6 INCOME TAX BENEFITS AVAILABLE

UNDER VARIOUS PLANS OF LIFE INSURANCE
POLICIES
1) Deduction allowable from Income for payment of Life Insurance
Premium (Sec. 80C).
(a) Life Insurance premium paid in order to effect or to keep in force an

insurance on the life of the assessee or on the life of the spouse or any child of
assessee & in the case of HUF, premium paid on the life of any member thereof

under an insurance policy, ( other than a contract for a deferred annuity,) shall be
eligible for deduction only to the extent of 20% of the actual capital sum assured.
(b) Life Insurance premium paid in order to effect or to keep in force an

insurance on the life of the assessee or on the life of the spouse or any child of
assessee & in the case of HUF, premium paid on the life of any member thereof ,
under an insurance policy , ( other than a contract for a deferred annuity,) shall be
eligible for deduction only to the extent of 10% of the actual capital sum assured.
(c) Contribution to deferred annuity Plans in order to effect or to keep in

force a contract for deferred annuity, on his own life or the life of his spouse or
any child of such individual, provided such contract does not contain a provision to
exercise an option by the insured to receive a cash payment in lieu of the payment
of annuity is eligible for deduction.
(d) Contribution to Annuity Plans - New Jeevan Dhara, New Jeevan Dhara -
I & Jeevan Akshaya - VI
2) Jeevan Nidhi Plan & New Jeevan Suraksha - I Plan (U/s. 80CCC)
A deduction to an individual for any amount paid or deposited by him from his
taxable income in the above annuity plans for receiving pension (from the fund set
up by the Corporation under the Pension Scheme) is allowed.
NOTE: The aggregate amount of deduction under u/s 80C, 80CCC & 80CCD (1)
shall not in any case exceed one lakh Rupees. However, there is no sectoral cap
i.e. the limit of Rs.1, 00, 000/- can be exhausted by paying premium under any of
the said sections.
3) Deduction under section 80D

a) Deduction allowable upto Rs.15,000/- if an amount is paid to keep in force

an insurance on health of assessee or his family (i.e. Spouse & dependent children)
or any contribution made to the central Government Health Scheme or on account
of Preventive health check - up of the assessee or his family .
b) Additional deduction upto Rs.15,000/- if an amount is paid to keep in force

an insurance on health of parents or on account of Preventive health check - up of
the parent of the assessee, whether dependent or not .
c) In case of HUF, Deduction allowable upto Rs.15, 000/- if an amount is paid

to keep in force an insurance on health of any member of that HUF
d) In Case the amounts are paid in (a) or (b) or (c) on account of preventive
health check up , the deduction for such amounts shall be allowed to the extent it
does not exceed in aggregate Rs. 5,000 /-.
e) For the purpose of deduction, the payment shall be made by
i. Any mode, including cash. In respect of any sum paid on

account of preventive health check up.
ii. Any mode other than cash in all other cases.
Note: If the sum specified in (a) or (b) or (c) is paid to effect or keep in force an
insurance on the health of any person specified therein who is a senior citizen,
then the deduction available will be upto Rs.20,000/-. Here senior citizen means
the person who is of sixty year or more during the previous year.
Provided that such insurance is in accordance with the scheme framed by
a) The General Insurance Corporation of India as approved by the

Central Government in this behalf or;
b) Any other insurer and approved by the Insurance Regulatory and

Development Authority.
4) Jeevan Aadhar Plan (Sec.80DD) :

Deduction from total income upto Rs.50000/- allowable on amount deposited with
LIC under Jeevan Aadhar Plan for maintenance of an handicapped dependent
(Rs.1,00,000/- where handicapped dependent is suffering from severe disability)
5) Exemption in respect of commutation of pension under Jeevan Suraksha

& Jeevan Nidhi Plans:
Under Section 10(10A) (iii) of the Income-tax Act, any payment received by
way of commutations of pension out of the Jeevan Suraksha & Jeevan Nidhi
Annuity plans is exempt from tax under clause (23AAB).

CHAPTER-7 TAX SAVING THROUGH LIFE

INSURANCE
If you look at the tax saving financial products available in the market, life
insurance is one of the most effective ones for it not only provides financial
protection for your loved ones, it also goes a step ahead to offer a host of tax
benefits.
The best time to start tax planning is always at the beginning of a financial year
when salaried class get their salary increment and self-employed and businessmen
have a clear idea of how much they earned during the previous year. Unfortunately,
most of us land up investing in a hurry without proper planning or evaluating
various tax saving products and features during the last quarter of the financial
year. So the time is now to review our tax incidence for the year and plan the
investment in tax savings tool.
If you look at the tax saving financial products available in the market, life
insurance is one of the most effective ones for it not only provides financial
protection for your loved ones, it also goes a step ahead to offer a host of tax
benefits. You can avail a tax benefit by way of deduction towards premium paid on
life insurance policies up to Rs. 1,50,000 under Section 80C of the Income Tax
Act, 1961. This also includes premium paid by you for life insurance for your
spouse or premium paid for your childs policy. Any yearly income on life
insurance policy in the form of bonus and even the lump sum amount at the end of
policy tenure are also tax free in accordance to section 10(10D) of income tax act.

You can purchase life insurance in the form of a term plan, traditional savings &
protection plan, whole life plan, ULIP or as a pension plan. Of these, term plans
are pure life cover but others are a mix of life cover and savings. However, for tax
saving purposes, all are equally beneficial as the application of tax laws is same for
all life insurance plans.
Retirement or pensions plans are slightly different from other life insurance plans
in the way the investment and payout is structured. Any pension plan has two parts
accumulation and payout or withdrawal. The policy works in a way that you pay
premiums till the maturity date following which you are entitled to receive one-
third as a lump sum payout and rest is paid out as regular pension throughout your
life and that of your spouse depending on the pension option you have opted for.
Tax benefits can be availed during the accumulation phase, i.e. for the premium
paid each year. You can avail deduction under section 80CCC up to Rs. 1.5 Lakh.
In the withdrawal phase, while the one-third lump sum payout is taxfree, the
remaining amount paid as regular pension is defined as income for that year.
Tax Benefits on Riders
There are various riders or additional benefits that can be added to a life insurance
plan, for a minimum cost. Such riders include critical illness, waiver of premium,
personal accident and disability insurance. These riders offer tax benefits as well.
Any additional premium paid for rider add-ons are eligible for tax deduction in line
with life and health covers. Under health cover, you can claim tax benefit under
Section 80D up to Rs.25,000 for yourself, spouse and children. An additional
premium up to Rs. 30,000 for medical cover of parents can be claimed for tax

deduction if the parents are senior citizens. In addition, you can also claim tax
rebate up to Rs.5,000 for preventive health check-ups. The rider that you have
opted for determines the nature of tax benefit. For example, for the critical illness
rider, the relevant section for tax benefit will be 80D.
Meeting the Income Tax Act requirement
Before you buy insurance, you should also analyse if the cover being provided is in
accordance to exemptions/deductions available under Income Tax Act. Under the
Act, the life cover should be at least 10 times the annual premium to be eligible for
tax deduction. For example, if you pay Rs. 30,000 as an annual premium, your
policy should provide you with a life cover of at least Rs. 3 Lakh (10 times of Rs.
30000) to avail tax benefits.
Example
Lets take an example to see how this works. Say, Anil has a term plan for Rs. 1
crore as a life cover for himself and has bought a traditional life cover of Rs. 5 lakh
for his wife Sunita last year with a critical illness rider. Additionally, he pays a
premium for Rs. 45,000 annually for a child plan he has invested in for his
daughter Ria with maturity amount of Rs. 60 lakh paid in stages to provide for her
education and marriage.
Anils annual premium for his term cover is Rs. 8,000 and that of his wife is Rs.
4,000 and Rs.2,000 for the rider. Further, he also makes it a point to get a health
check-up for himself each year. Unfortunately, due to his busy schedule, he has
often ignored long-term tax planning and takes into account his tax liability only in

February. Further, he is unaware of benefits he can claim from riders or health

check-ups. According to his salary, he needs to invest Rs. 62,000 in tax saving
instruments to save on taxes this year. Anil thinks he has already invested Rs.57000
as premiums and needs to make an additional investment of Rs. 5000 (Rs.62000-
Rs.57000) to avail maximum tax benefit. But does he really need to do that? Lets
find out.
Anil and Sunitas policy (without taking the rider and its premium into account)
clearly covers them more than 10 times of premium. Hence, these can be
considered for tax deduction. Further, his child plan for Ria also meets the criteria
making his tax saving investment as Rs.57000 for the year (adding the premiums
of Rs.8000, Rs.4000 and Rs.45000) under section 80C. As he needs to show
Rs.62000 as his annual investment, Anil thinks he is falling short of Rs.5000.
However, if he makes himself aware of all tax benefits his plan provides, he will
find that he has already met his tax liability with Rs.2000 that he pays for the
critical illness rider and upto Rs.5000 that he spends on his preventive health
check-up adding another Rs.7000 eligible for tax deduction under section 80C and
80D, taking his total tax saving investment to Rs. 63,000.
Thus you can see that considering all the tax saving features of his policy, Anil was
able to get the required tax benefit, preventing additional financial liability on him
for tax saving.
While the primary objective of life insurance is protection, it is a great tool for tax
saving. What is important is to be aware of all the features and benefits from a tax
saving perspective to gain maximum advantage. With life insurance you can thus

serve the objective of providing for your familys protection and also save tax in
the process.

CHAPTER-8 CASE STUDY

It is important to plan one's finances properly. Plans should never be made on an
ad-hoc basis or for a temporary goal or towards an ill-conceived objective. By
proper tax planning, one not only reduces the tax liability but also end up saving
towards the various goals one has set at different life stages.
Choosing the right tax-saving vehicle rests primarily on four things: How to avail
tax benefits, the kind of tax-saving instrument, the tenure, and the taxability status.
Equally important is to choose a tax-saving instrument which can be linked to a
specific goal.
How to avail tax benefits: One may consider Section 80C which allows annual
tax benefits of up to Rs 1.5 lakh in one or more eligible investments and specified
expenses. The eligible investments include life insurance, equity-linked savings
schemes (ELSS) mutual funds, public provident fund (PPF), national savings
certificate (NSC), etc., while expenses and outflows can include tuition fees,
principal repayment of home loan, among others. If the taxpayers have exhausted
their annual limit of Rs 1.5 lakh, they can now look at National Pension System
(NPS) to save for their retirement and in the process save additional tax. From
2015-16 onwards, an additional deduction of up to Rs 50,000 is also possible. For
someone in the highest 30 per cent income tax bracket, it's an additional annual
saving of about Rs 15,000.
Premium paid towards a health insurance plan for self and family members
qualifies for tax benefit under Section 80D for Rs 25,000 and Rs 30,000 for those
above 60. If one has a home loan, interest payments made towards its repayment
can also be claimed under Section 24. The other deductions include donations
under Section 80G, interest payments under Section 80E for education loan, etc.
Kind of tax-saving instrument: Within the basket of Section 80C investments, there
are two options to choose from - ones with "fixed and assured returns" and
"market-linked returns". The former primarily consists of debt assets, including
notified bank deposits with a minimum period of five years, endowment, PPF,
NSC, senior citizens savings scheme (SCSC), etc. The 'market-linked returns'
category is primarily the equity-asset class. Here, one can choose from ELSS of
mutual funds and the unit-linked insurance plan (Ulip), including pension plans
and the NPS.

Tenure: All the above tax-saving instruments by nature are medium to long term
products - from a three-year lock-in that comes with ELSS to a 15-year lock-in of
PPF.
Taxability of interest: Another important factor to consider is the post-tax return

of the tax-saving investment. For instance, most fixed and assured returns products
such as NSC provide you with Section 80C benefits but the returns, currently 8.1
per cent (five-year) annually, are taxable. This makes the effective post-tax return
equal to 5.60 per cent for the highest taxpayers. Of all the tax-saving tools, only
PPF, EPF, ELSS and insurance plans enjoys the EEE status, i.e., the growth is tax-
exempt during the three stages of investing, growth and withdrawal. Considering
the annual inflation of six per cent, the real return is almost zero! Inflation erodes
the purchasing power of money, especially over long term.
Making the right choice
First, identify a goal, medium or long term. An equity-backed tax-saving

instrument would suit long term goals as equities need time to perform. As wealth
keeps accumulating over the long term, try a tax-free investment. And, before
considering a taxable investment, see the tax rate that applies to you and consider
the post-tax return. A low post-tax return after adjusting for inflation will not help
you in achieving your goals in the long run.
Conclusion
Efficient tax planning should ideally begin at the start of every financial year.
Remember, the risks of planning tax-saving in a hurry later are manifold. There is,
for instance, a high probability of picking up an unsuitable product.
Also, there is no one instrument that can help you save tax and at the same time
also provide safe, assured and highest return. Your final choice should ideally be
based on a gamut of factors rather than solely being driven by returns from the
financial product.

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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS

An insurer, or insurance carrier, is a company selling the insurance; the insured, or

History of insurance refers to the development of a modern business

INSURANCE AS A TAX SAVING TOOL Page 1

INSURANCE AS A TAX SAVING TOOL Page 2

INSURANCE AS A TAX SAVING TOOL Page 3

The total income of a person is segregated into five heads:-

Income from Salary

Income from Salary

All income received as salary under Employer-Employee relationship is taxed under

INSURANCE AS A TAX SAVING TOOL Page 4

tax compulsorily (subject to Section 192), if income exceeds minimum exemption

Income from House property

The computation of income from let-out property is as under:-

Gross Annual Value (GAV) xxxx

Less: Municipal Taxes paid (xxx)

Net Annual Value (NAV) xxxx

Less: Deductions under (xxx)

INSURANCE AS A TAX SAVING TOOL Page 5

Income from House property xxxx

Income from Business or Profession

In summary, the sections relating to computation of business income can be grouped

Sections 30 to 37 cover expenses which are expressly

INSURANCE AS A TAX SAVING TOOL Page 6

Deemed Incomes Sections 33AB, 33ABA, 33AC, 35A, 35ABB, 41.

Sections 42, 43C, 43D, 44, 44A, 44B, 44BB, 44BBA,

Presumptive Income Sections 44AD, 44AE.

Less: Expenses deductible (net of disallowances) under this head (xx)

Income from Capital Gains

Full value of consideration1 xxx

Less: Cost of acquisition (xx)

Less: Cost of improvement (xx)

Less: Expenditure pertaining to

Computation of Capital Gains:-

In case of transfer of land or building, if sale consideration is less than the

Any share in any company

Units of UTI or mutual fund, and

INSURANCE AS A TAX SAVING TOOL Page 8

Income from Other Sources

1. Income by way of Dividends.

2. Income from horse races/lotteries.

3. Employees' contribution towards staff welfare scheme.

4. Interest on securities (debentures, Government securities and bonds).

5. Any amount received from keyman insurance policy as donation.

6. Gifts (subject to certain conditions and exemptions).

7. Interest on compensation/enhanced compensation.

CHAPTER-2 Life insurance

INSURANCE AS A TAX SAVING TOOL Page 10

Life-based contracts tend to fall into two major categories:

Protection policies designed to provide a benefit in the event of specified

Investment policies where the main objective is to facilitate the growth of

INSURANCE AS A TAX SAVING TOOL Page 11

History of life insurance

Insurance began as a way of reducing the risk to traders, as early as 2000 BC in

INSURANCE AS A TAX SAVING TOOL Page 12

INSURANCE AS A TAX SAVING TOOL Page 13

CHAPTER-3 Types of life insurance policies

(1) Whole life Policy:

(2) Limited payment life policy:

(3) Endowment policy:

(4) Double endowment policy:

INSURANCE AS A TAX SAVING TOOL Page 15

(5) Joint Life Policy: