How do tax benefits differ between health and life insurance?

Tax benefits are an excellent way to lower your taxable income and increase your savings. Both health and term life insurance policies have specific tax benefits under the Income Tax Act, though the rules for the two are different.

Through this guide, you will gain insight into the tax benefits of health and term insurance, their key differences and how to apply for them.

What are the tax benefits of health insurance?

You are eligible to avail of a health insurance tax benefit under Section 80D of the Income Tax Act if you meet the given conditions:

• Only individuals and a Hindu Undivided Family (HUF) member are eligible to avail of the tax benefit.
• The deduction applies to premiums paid for mediclaim and critical illness insurance plans. Premiums for personal accident policies do not qualify for a tax deduction.
• Individuals can claim tax deductions up to Rs 25,000 within a financial year, while for senior citizens, the threshold increases to Rs 50,000. This limit also includes a Rs 5,000 deduction on preventive health check-ups.
• Expenditure on preventive health check-ups is partly eligible for tax benefits when combined with a health insurance policy.
• You can purchase the policy for yourself, your spouse, dependent children, or parents.
• Premiums must be paid through non-cash modes to qualify for tax deduction. However, cash payments made towards preventive health check-ups are allowed.

What are the tax benefits of life insurance?

Section 80C of the Income Tax Act caters for deductions in respect of premiums paid on life insurance, subject to the following conditions:

• Resident and non-resident Indian citizens, as well as members of HUF, are eligible to claim these benefits.
• The maximum deduction that can be allowed under this section, including the life insurance premium paid, is Rs 1,50,000 per financial year.
• Under this section, you can purchase a life insurance policy for yourself, your spouse, or your children.
• Eligible policies under Section 80C include traditional life insurance plans, term insurance policies, and Unit Linked Insurance Plans (ULIPs).

However, remember that if an ULIP is surrendered within five years or a traditional policy within two years, the tax relief already granted will be withdrawn.

Key differences between tax benefits for health and life insurance

While 80C and 80D of the Income Tax Act offer avenues for tax saving under life and health insurance policies, the scope and benefits are very much divergent. The major points of difference are given below:

How to avail tax benefits from an insurance plan?

When preparing your Income Tax Return (ITR) for the concerned financial year, you need to appropriately claim the available tax benefits of both your health and life insurance policies. To do so, follow these steps:

• Choose Section 80D and Section 80C under the ‘Deductions’ section of your ITR form to claim tax relief on health insurance premiums.
• You need to choose the deduction category that aligns with your specific circumstances.

1. Self and family 
2. Self and family (aged above 60)
3. Self and parents
4. Parents (aged above 60)
5. Self, family, and parents
6. Self, family, and parents over 60
7. Individual along with their family and parents over 60

• Make sure to attach valid proof of payment, such as the health insurance premium receipt, to support your claim. This documentation allows the Income Tax Department to verify your eligibility for the deduction.

While doing financial planning, it is crucial to understand the difference between tax benefits provided under health and life insurance. This enables you to make informed decisions and make the most of the tax-saving benefits provided by the government.

To achieve maximum tax savings and prevent unnecessary penalties or interest, it is important to remain updated about recent provisions and any annual changes in tax legislation.