Trap 15. ‘Buy Life Insurance Policy To Save Tax’

Aditi Anvita, 32, from Bharatpur  an IT professional was told by a financial advisor in 2022 about the benefits of having an insurance policy. He had a one-line pitch: invest in a policy, and reduce your tax liabilities significantly. The prospect of getting an immediate tax relief attracted Aditi. She went for a plan with higher premiums to get maximum tax benefits. Aditi thought it was a smart investment move, but later realised that her policy was neither offering her the desired coverage nor was it aligned with her future financial goals.

Insurance policies are often mis-sold during the tax season. Says Sameer Gogia, tax consultant at Deloitte India: “Insurance has always been promoted as a tax-saving instrument in India, leading to widespread mis-selling, thus defeating its main objective, which is dealing with risks.”

There is no denying that saving tax is a legitimate benefit of having an insurance policy, but you must ensure that it serves the primary purpose of protecting your family by providing adequate coverage.

Says Gogia: “The prospects for reducing taxation often attract individuals, especially those who are financially illiterate to procure insurance products without grasping all its implications regarding future commitments and pitfalls like being locked into high-premium long-term policies that yield poor returns. The obsession with tax savings makes consumers ignore other significant elements of sound financial planning, such as sufficient life and health cover or pension plans.”

Moreover, with the government laying impetus on the new tax regime, the old tax regime that allows deductions on investments towards insurance under Section 80C of the Income-tax Act, 1961, could be phased out. The Budget announced that reforms on direct and indirect taxation is in the works.

So treat the sales pitch that Aditi was convinced by as a red flag and take a proactive approach to understand why and how much insurance you need. Evaluate a policy on various parameters like its actual benefits, coverage, and alignment with your financial goals instead of focusing on peripheral aspects like tax benefits. Irdai has taken some steps to address such issues, but consumer awareness is the key to combating mis-selling.