A life insurance plan is one of the best investments that you can ever make. It helps you secure your family financially in the event of your untimely death. However, that's not the only benefit that it comes with. Did you know that you can actually save tax by investing in a life insurance policy? Sounds hard to believe, right? But it's true.
Life insurance is more tax efficient - ABSLI As a matter of fact, life insurance is one of the most tax-efficient investment options currently available, since it falls under the exempt-exempt-exempt (EEE) tax status. Wondering what EEE is and how life insurance is more tax-efficient? Let's take a look.

What is exempt-exempt-exempt?

Every investment option generally has three primary stages - investment, growth, and maturity. Now, an investment option that offers tax benefits 1at all these three stages comes under the exempt-exempt-exempt category.

The investments that fall under the EEE category are considered to be the most tax-efficient options, since they offer three tax benefits1 across their different stages. And as you already know, a life insurance plan is one such option that falls under the EEE category of investments.

What are the tax benefits³ offered by life insurance?

According to the provisions of the Income Tax Act, 1961, (hereafter referred to as 'the Act') a typical life insurance plan comes with three kinds of tax benefits. Here's an overview of these provisions.

1. <strong>Tax benefits on premiums</strong><br>The premiums that you pay towards a life insurance<sup>1</sup> plan can be claimed as deductions from your total taxable income. This deduction can be claimed up to Rs. 1.5 lakh, under [section 80C of the Act] (https://lifeinsurance.adityabirlacapital.com/articles/income-tax/income-tax-deduction-under-section-80c). This deduction is available to you each financial year. By making use of this provision, you can reduce your total taxable income, thereby leading to lower tax liability.<br>

Why is life insurance more tax-efficient than other investment options?

Investment options such as stocks, tax-saving FDs, pension schemes, mutual funds, and National Savings Certificate (NSC), among others, do offer tax benefits. However, they don't come with the same level of tax benefits as a life insurance policy.

For instance, let's take up the conservative investor's preferred investment - tax-saving FDs. They come with a mandatory lock-in period of 5 years and offer tax deductions of up to Rs. 1.5 lakh each financial year under section 80C of the Income Tax Act, 1961. And the maturity amount that you receive at the end of its tenure is also tax-free. However, the interest that you earn from your investment capital is taxable in your hands. So, that's only 2 out of 3 possible tax benefits.

Similarly, with National Savings Certificate (NSC) investments, you get the ability to claim tax deductions of up to Rs. 1.5 lakh each year. But the maturity amount that you receive at the end of the tenure is added to your total taxable income and is taxable in your hands.

It is for this reason that life insurance is considered to be the most tax-efficient. The triple tax benefits that a life insurance policy comes with not only helps you create wealth over the long-term, but also helps you save tax along the way.

Last words

Although a life insurance policy comes with these many tax benefits, it shouldn't be the only reason for getting one. Always remember that the primary goal of a life insurance policy is to give you the ability to secure your family financially in the event of your untimely demise. So, when you're going to purchase one for yourself and your family, ensure that you look at it objectively and not with a view to only save tax.