4. Buying Life Insurance For The Purpose Of Tax Planning
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For many years agents have inveigled their clients into buying life insurance plans to save tax under Section 80C of the Income Tax Act.
Investors should realize that insurance is probably the worst tax saving investment. Return from insurance plans is in the range of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives close to 9% risk-free and tax-free returns.
Equity Linked Saving Schemes, another 80C investment, gives much higher tax-free returns over the long term. Further, returns from insurance plans may not be entirely tax-free.
If the premiums exceed 20% of the sum assured, then to that extent the maturity proceeds are taxable.
As discussed earlier, the most important thing to note about life insurance is that objective is to provide life cover, not to generate the best investment return.