How Does a Child Insurance Plan Work?
Before understanding the child insurance tax benefits, let’s understand how a child insurance plan works. As a parent, an important consideration you might have is making sure your child’s future is bright. While you may be working hard today and be able to provide for your child, one cannot say when an unfortunate event might occur and lead to your child lacking financial security. Hence, a child insurance plan can be a preferable inclusion in a parent’s financial portfolio.
Child insurance plans are designed to provide financial support for your child’s future, even when you are not around. There can be different types of child insurance plans, like endowment plans, money-back plans , ULIPs etc.
When you buy a child insurance plan, you choose the policy details, like the sum assured, policy term, premium payment frequency, etc. In child-oriented ULIPs, the premium amount selected by you influences the sum assured, subject to the minimum thresholds and design norms prescribed and the specific terms of the product.
After you buy a child insurance plan, you start saving for your child’s future. However, during the policy term, if you (the life assured) pass away, the plan does not stop, if wavier of premium is there with plan. Child insurance plans usually have a premium waiver benefit. This benefit waives the premiums after the parent’s demise. The insurance company pays the premium on the parents’ behalf, and the policy continues. On maturity, child insurance plans pay the specified maturity benefit, providing the child with the financial assistance that the parent had planned on, even in the parent’s absence.
Alternatively, if the parent survives the policy tenure, the maturity benefit is paid, which gives the parent the financial corpus planned for the child. The parent can use the benefit to fund the child’s higher education, marriage, or any other financial need.
In some child plans, the payout may be provided at designated periods in the child’s life, such as when they start their higher education, get married, or pursue their entrepreneurial venture, etc. Let’s take Mr. Rahul’s example. Mr. Rahul had plans to send his 3-year-old daughter, Deepika, to a foreign university for her higher education. So, he bought a child insurance plan which would provide a payout when Deepika turned 18 years old. He estimated the total cost of her foreign higher education plan to be around Rs 80 lakhs, taking an average inflation rate of 5%. He paid the premiums on time throughout the tenure. When Deepika turned 18 years of age, she opted for a university of her choice. The payout received from the child insurance plan eased out her finances for this big step.
What Are the Income Tax Benefits of A Child Insurance Plan?
As mentioned earlier, the tax benefits on child insurance plans are substantial. Here is a brief look at them:
Deduction on premiums
Under Section 80C of the Income Tax Act of 1961, the premiums paid for a life insurance policy bought in the name of self, spouse, or child, may be used to claim tax deductions up to a maximum of Rs 1.5 lakhs, subject to the provisions stated therein under old tax regime. Thus, the premiums that you pay for the child insurance plan may help you reduce your tax liability by a considerable amount.
To claim child insurance tax benefits under Section 80C incase of old tax regime, it is required that your annual premium should not exceed 20% of the capital sum assured if your policy is bought before 1st April 2012. For policies purchased thereafter, the annual premium should not exceed 10% of the capital sum assured. If the premium amount exceeds the threshold limit, deduction is restricted up to 20% or 10% of the capital sum assured as per the policy issuance date.
An important point to note is that tax benefits on a child insurance plan involving Section 80C are only available for those who pay tax under the old tax regime. If you have selected the new tax regime, then these tax benefits may not be applicable to you.
Exemption on maturity proceeds
As per Section 10 (10D) of the Income Tax Act of 1961, the maturity proceeds (including bonuses) from any type of life insurance plan are eligible for tax exemption, subject to the satisfaction of conditions mentioned therein. So, the pay-outs you may receive from the child insurance plan may not be taxed as income.
This tax benefit is not applicable to policies bought before 1st April 2012, where the annual premium exceeds 20% of the capital sum assured. The limit decreases to 10% of the capital sum assured for policies bought after 1st April 2012.
Please note that these tax benefits are subject to changes in the tax laws.
Depending on the type of policy you have opted for, the terms and conditions for claiming the tax benefits on the child insurance plan may vary. Income from life insurance policies (other than ULIP) with annual premium aggregating up to Rs. 5 lakhs, issued on or after 1st April, 2023, will be tax-free as per the provisions of the Income Tax Act, 1961 subject to satisfaction of certain conditions. If the aggregate premium of life insurance policies (Other than ULIP) exceeds Rs. 5 lakhs during the term of the policy, the policyholder will have to pay tax on the maturity proceeds, as per the provisions of the Income Tax Act, 1961. The death benefits, however, will be exempt from taxes irrespective of the premium amount.
Income from ULIPs with an annual aggregate premium above Rs. 2.5 lakhs issued on or after 1 February 2021, will attract capital gains tax, as per the provisions of the Income Tax Act, 1961. If the ULIP policy is issued before 1 Feb 2021, proceeds from such policy will be tax-free in the hands of the policyholder, subject to the satisfaction of conditions mentioned under Section 10(10D) of the Income Tax Act, 1961
Exemption on the death benefit
The death benefit received from child insurance plans is also allowed as a tax-free income for the nominees or beneficiaries. This tax exemption is allowed even if the premium is more than 10% or 20% of the sum assured.
Effective Strategies to Get the Most Tax Benefits
Here are some tips that can help you maximise the tax benefits on child insurance plans -
Start early
Buy a child insurance plan after you become a parent. This will have two benefits. One, you will have a long-term horizon to plan your corpus. Two, you can start enjoying tax benefits on the premiums paid.
Choose the right sum assured
When choosing the sum assured, ensure that it is sufficient to provide the desired financial assistance to your child. This would also give you the optimal premium amount, which you can claim as a deduction under Section 80C.
Pay the premium regularly
Pay the premiums of the child insurance plan as and when they are due. You can claim the tax benefit in the financial year in which the premium is paid. So, do not miss premium payments and enjoy the full coverage of the policy as well as tax savings.
Importance of buying life insurance for children
Buying child insurance plans is a strategic and effective move for parents looking to plan for their child’s future. Here are some reasons which make child plans a useful choice -
Life Insurance coverage
Child insurance plans offer life insurance coverage to the life assured . In the event of the life assured’s demise during the policy tenure, a death benefit is paid. This death benefit can give the family the necessary financial assistance and help them meet their needs easily.
Waiver of premium benefit
As mentioned earlier, most child insurance plans offer the premium waiver feature either as an inbuilt benefit or as an optional rider. This feature adds different value to the policy, which continues even in the absence of the parent. If the parent passes away during the policy term, the premium waiver benefit waives the future premiums without affecting the coverage and policy continuation. On maturity, the specified maturity benefit is paid, which can give the child the funds needed for higher education, marriage, or any other financial need.
Tax benefits
As discussed earlier, child insurance plans also offer tax benefits on the premiums paid under old tax regime as well as the benefits received. These benefits help you create a tax-efficient corpus for your child’s needs.
Peace of mind
With a child insurance plan, parents can get peace of mind knowing that their child’s future will not be impacted financially if they are not around. This peace of mind makes child insurance plans important for parents.
Key Takeaways
- Child insurance plans are life insurance plans that help parents create a secure corpus for the financial needs of their children.
- Child insurance plans offer a range of tax benefits, allowing parents to save taxes too while saving up for their child’s needs.
- The premiums paid for child insurance plans are allowed as a deduction under Section 80C under old tax regime, subject to provisions of the Income Tax Act , 1961.
- The maturity benefit is tax-free under Section 10(10D), subject to provisions of the Income Tax Act , 1961 .
- The death benefit received is also tax-free for the nominee of the child insurance plan.
- Make the most of the tax benefits on child plans by starting early, choosing the right sum assured, and paying the premiums without fail.
Conclusion
Child insurance plans not only help you create a corpus for your child’s future, but they can also help you plan your taxes and reduce your tax liability. By choosing the right child insurance plan, you can financially secure your child’s future even in your absence and also enhance your disposable income. So, understand the tax benefits on child insurance plans and use them to your advantage to create a tax-efficient corpus for your child’s future.
FAQs
How can I get an idea of my tax liability after deducting the child insurance premiums?
To get an estimate of your tax liability, you may use an income tax calculator. You may need to add your personal details, such as salary, income from other sources, deduction-related details for the investments you have made, and you may be able to see the tax liability under the old and new regimes.
How can I use the child plan calculator?
A child plan calculator is a tool that estimates the premium amount you may need to pay under the child plan to help achieve the goals set for your child.
You may have to input some details into the calculator, such as the goal amount you require, by what time, the expected rate of return, the rate of inflation, and so on. Once you have entered these details, the calculator shows you an approximate figure you may pay at regular intervals to achieve your child’s goals.
Is the maturity benefit of a child insurance plan taxable?
Yes, the maturity benefit of a child insurance plan also enjoys tax exemption under Section 10(10D), subject to the fulfilment of specific terms and conditions.
Can NRIs claim tax benefits on child insurance plans?
Yes, NRIs can also claim a deduction on the premium paid for child plans under Section 80C under old tax regime. Plus, the tax exemption on maturity benefits under Section 10(10D) is also available for NRIs subject to satisfaction of conditions.
