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What do companies not tell about life insurance?

How to understand Income Tax Act in layman’s term?

Almost all of you would be surprised to know that there exists section 80A as well as section 80B under the Income Tax Act, 1961. Indian taxation system is divided into sections starting from 80A to 80U. These are further divided into sub-sections. But most of us are concerned about section 80C only. This is because; section 80C enables us to get a tax deduction of 1, 50,000 rupees for an individual (Below 60 years) or a HUF (Hindu United Family).

Section 80A talks about deductions to be made in computing total income. Section 80B of Income Tax Act 1961-2017 provides for definition of gross total income. Similarly, section 80D deals with medical related expenses and 80E are related to Education; so on so forth. Let’s have a look on the below table to understand each of the sections and sub-sections of Income Tax Act, 1961.

Section 80C Deduction Table:

Section Details

As you now understand different sections and how you can save tax on income. Let’s see how much an individual (a male below 60 years) and HUF (Hindu United Family) can save taxes by doing different investment and expenses. It is important to note that the gross income below Rs. 2, 50,000 is not liable for any taxation.

Suppose that an individual has an annual “Gross Total Income” of Rs. 5, 00,000. In this case, he is liable to pay a minimum tax of Rs. 13,000, if he does not make any investment. On the other hand, he will have to pay a total tax of Rs. 2,600, if he does an investment of 1, 50,000 under section 80C. It does not matter even if he invests his entire amount (Rs. 5,00,000) under the section 80C. He would still have to pay Rs. 2,600. There is a maximum cap on investment that can be used to take tax benefits under Section 80C.

Section 80C: The section under which you claim your tax deductions.

Suppose that an individual has an annual “Gross Total Income” of Rs. 5, 00,000. In this case, he is liable to pay a minimum tax of Rs. 13,000, if he does not make any investment. On the other hand, he will have to pay a total tax of Rs. 2,600, if he does an investment of 1, 50,000 under section 80C. It does not matter even if he invests his entire amount (Rs. 5,00,000) under the section 80C. He would still have to pay Rs. 2,600. There is a maximum cap on investment that can be used to take tax benefits under Section 80C.

There are various sub-sections under 80C and as discussed above the maximum amount you can save is Rs. 1, 50, 000. There are two types of schemes that you choose to invest to get the deduction under this section. One is investments done using SIPs & Bonds. Another one is expenses incurred for tuition fees & premium towards life insurance. Under the first category, there are further 12 schemes that you can choose from. Similarly, under second category there are 4 expenses that you can choose to pay in the form of premium and claim tax benefits.

Following are the list of investments that qualify for deductions under 80C:

  • Public Provident Fund (PPF)
  • Employee Provident Fund (EPF)
  • Voluntary Provident Fund (VPF)
  • Five-Year Post Office Time Deposit (FD)
  • Equity Linked Savings Scheme (ELSS)
  • Five-Year Tax Saving Bank Fixed Deposit (FD)
  • National Savings Certificate (NSC)
  • Senior Citizens Savings Scheme (SCSS)
  • Unit Linked Insurance Plan (ULIP)
  • Sukanya Samriddhi Scheme (SSS)
  • Infrastructure Bonds (Bonds)
  • NABARD Rural Bonds (Bonds)

The following are the expenses that qualify for tax deductions under Section 80C:

  • Premium payments made towards life insurance policies
  • Tuition fees for children’s education
  • Repayment of principal amount on the home loan
  • Registration fees and stamp duty for house property

Looking at the options to invest-in for tax deductions, it becomes evident that you need to go beyond ‘saving money mentality’ to ‘making money mentality’. This is because you can’t squeeze all of your investment under 80C as the maximum cap on tax benefit is 150000/- and you need to look beyond it.

Risk and return should influence you while framing your investment portfolios.

In today’s global economy you have myriads of options to invest in, from real estates to bullion, from currency to commodity and from stocks to crypto-currencies. In almost all investment portfolios the return is directly proportional to risk. For example, investments in gold have a very little risk. They keep on growing steadily and give you sizeable ROI over a longer period of time. Similarly, PPF and ELSS give you sizeable ROI in relatively smaller time but come with a risk associated with market. With the advent of block-chain technology, you can earn a fairly handsome return within months or even days. But, this type of investment is quite riskier, second only to gambling.

So where does ‘Life Insurance’ sits in all this jargons of investment?

Frankly speaking, life insurance policies are not an investment but it’s actually an expense that you endure to dodge-off the fear of poverty striking your family when you die. There are other better options you can choose to secure the future of your family. Let’s see how the wealth grows over 20 years’ time if two investments of the same amount are done continuously in ELSS and Life Insurance.

Nature of Investment : SIP
Amount of Investment: ₹ 1000/-
Frequency Of SIP: Monthly
Expected Rate Of Return P.A: 5 % (LIC) and 15%(ELSS)
Duration Of SIP: 20 YEARS

LIC Policies: ₹ 4,11,034
ELSS: ₹ 14,97,239

Observing the above data, it is clear that at the end of 20 years, the amount received from ELSS is ₹ 14,97,239 and from Life Insurance it’s ₹ 4,11,034. Here the insurance company wins and you lose. Also, you cannot have an insurance of millions of rupees from an insurance company if your monthly salary is few thousands rupees or so. Not because you can’t afford the premiums but because insurance companies ensure you depending on your Human Life Value (HLV). HLV depends on a lot of factors like salary, type of job, health conditions and so on so forth. So to achieve a higher HLV one would have to improve his/her salary, health, occupation etc. If you can do that, wouldn’t you be able to create a security for your family while you are alive.

Everyone has got single life and you are not an exception.

To me, the life insurance policies are like absolution certificates. During sixteen century through eighteen century, Orthodox Christian churches were selling absolution certificates mostly in return of money. It was later infamously known as “Tickets to Heaven”. It was promised that people will be granted heaven after they die. The fact is, no one knows if a person will get to heaven or not if he dies. Also, the person does not know what will happen to his family when he dies.

The ugly truth is insurance companies are playing on people’s fear of death or permanent disability. Millions of people are paying for multiple insurance policies on which they will be able to claim only one. It is important to note that most of the people cancel the life insurance policies in the first 10 years. And, the winner here is insurance companies. A surprising amount of life insurance benefits are not ever paid out. Facts don’t lie, but people are very easy to convince.

People are easy to convince because they forget past easily and can’t see future easily.

My father took a life insurance policy some 20 years back. The maturity amount promised after 20 years looked quite big. He paid each payment diligently. After a few years, he lost the interest in the policy and decided to drop. But he was convinced to continue the policy because dropping the policy would nullify the premiums already paid. Later at the time of claiming maturity amount he was asked to furnish documents which even didn’t exist 20 years back.. After a lot of effort and running to bank many times, he was finally handed over a check of the maturity amount. The amount he received was amount I earn per month!

The fact that people fail to realize inflation and depreciation of the currency is a real thing. 100 million rupees might be a big amount now but not 20 years later. People cannot look forward into future but they can always look backward in past. Due to the limitation of seeing in future, most of the people end up believing rosy picture put on by insurance companies.

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