Reasons why term insurance should become a standalone deduction

The Budget is a financial framework that sets out the government’s plans for revenue and expenditure for the coming year. This year’s pre-budget discussions are very important as the world continues to reel from the impact of the COVID-19 pandemic. It is expected that the government will take into account the current global economic environment in the preparation of the Budget.

Whole life insurance, also known as term insurance, is one of the most important protections to have in the field of life insurance. This type of policy provides coverage for a specified period of time, usually 20 or 30 years, and provides benefits to designated beneficiaries in the event of the policyholder’s death during the term. One of the measures taken by the government to encourage people to take life insurance is to reduce the amount paid for that policy.

At present, the premium paid by the policyholder for a pure life insurance policy is allowed as a deduction from income up to a maximum limit of INR 1.50 lakh under section 80C of the Income Tax Act, 1961 (Act). However, Section 80C is a very comprehensive provision that allows individuals to claim deductions for certain types of investments and expenses including contributions to the Employees’ Provident Fund (EPF). , Public Provident Fund (PPF), children’s school fees, housing loan repayment. , equity linked savings system (ELSS), etc. and the deduction on all these is within the general ceiling of INR 1.50 lakh.

Therefore, the taxpayers suggested to establish a special tax deduction for the premium paid for pure life insurance. This expectation is based on the following reasons:

A. Encouraging more people to invest in life insurance:

Adding a separate tax deduction for long term life insurance can make this type of coverage more attractive to people who may not have considered it. People often don’t look at life insurance as an option to protect their loved ones, thinking that it is an expensive and complicated type of coverage. However, by offering a separate tax break for life insurance, the government will effectively communicate to the public that this type of coverage is not only important, but also financially viable. . This can be a powerful incentive for people to invest in term life insurance, as it will be cheaper and easier to understand. In addition, a separate tax deduction for long-term life insurance can dispel the misconceptions surrounding this type of coverage, making it more accessible to more people.

B. Recognizing the importance of protecting death benefits:

A separate tax deduction for long-term life insurance may recognize the importance of this type of coverage in providing benefits to loved ones, and support people in their efforts. they do it to protect their family’s health.

C. Simplification of the tax calculation process:

By offering a separate tax deduction for long-term life insurance, it can make the tax calculation process easier for individuals because they don’t have to consider other types of savings or investments when claim the deduction. The ceiling limit under section 80C and 80CCE makes the taxpayer aware of the amount of benefit available from deductions.

D. Financial incentives:

By providing a separate tax deduction for life insurance, it may encourage people to plan their finances more fully. It requires individuals to consider their financial needs and encourage them to consider other types of savings and investments other than life insurance. This will lead to better financial planning and decision-making, which will benefit individuals and society as a whole. By providing a separate tax deduction for life insurance, the government can encourage people to think long term about financial security and make decisions accordingly.

E. Reduction of the tax burden for individuals:

Splitting the tax deduction for term life insurance will go toward reducing your overall tax liability, leaving you with more money. By providing a special tax deduction for life insurance, the government will provide financial assistance to individuals, allowing them to save more money for their family’s future needs. In addition, it can also benefit society as a whole, as more people can provide for their families’ future needs.

In conclusion, introducing a special tax deduction for life insurance can bring many benefits to individuals and society as a whole. From encouraging more people to invest in life insurance to simplifying the tax calculation process, there are many benefits to such a move. It will recognize and support the importance of this type of coverage to protect the financial well-being of families. In addition, it will promote a culture of financial planning and help reduce the overall tax burden on individuals.

Akhil Chandna, Partner, Rajashree Sarna, Director and Pooja Lara, Manager – Grant Thornton Bharat