What Are The Tax Benefits Associated With Insurance?

In India, general insurance serves a dual purpose for financial planning—it acts as a crucial safety net for unforeseen emergencies and a strategic tool for tax saving investments. With the Income Tax Act of 1961, investing in general insurance provides several tax benefits that greatly reduce your overall tax bill.

However, the advent of a new tax regime in the Budget 2020 has created confusion among the general public regarding these tax deductions. With recent changes in tax rules, it is critical to grasp the financial benefits of general insurance under both the old and the new regime.

At Liberty General Insurance, we will take you through the differences in tax benefits, deductions, and calculations between the old and new regimes. Once known, it will help you make an informed choice about your tax saving investments, especially when it comes to general insurance.

The Current Income Tax Landscape of India

In the Finance Act 2020, Section 115BAC introduced a new tax regime with concessional tax rates and eliminated several deductions and exemptions available under the old regime. It went effective from FY 2020-21 (AY 2021-22) and was further revised in Budget 2023 to become the default tax system of our country.

Tax Rates Under the New and Old Regimes

The new tax regime has changed the income tax slabs and reduced the rates for various income levels. Here’s the comparison of tax rates between the new and old regimes:

Income Slabs	New Regime Rates	Old Regime Rates
Up to ₹3 Lakh	Nil	Nil
₹3 Lakh to ₹6 Lakh	5%	5%
₹6 Lakh to ₹9 Lakh	10%	20%
₹9 Lakh to ₹12 Lakh	15%	20%
₹12 Lakh to ₹15 Lakh	20%	25%
Above ₹15 Lakh	30%	30%

Tax Benefits Under the Old Regime

Under the old regime, taxpayers could avail of several deductions and exemptions that greatly reduce their taxable income:

• According to Section 80D, you get up to ₹25,000 health insurance tax benefits on premiums paid for self, spouse, and dependant children and ₹50,000 for the elderly aged 60 and above. Additionally, you get ₹5,000 for preventive health check-ups.
• According to Section 80DD, you get ₹75,000 tax benefits for medical treatment, training, and rehabilitation for disabled dependants and ₹1,25,000 for severe disabilities (80% or more)
• According to Section 80DDB, you get tax benefits of ₹40,000 for people under 60 years and ₹1,00,000 for seniors with severe medical expenses relating to specific diseases or disorders.

Tax Benefits Under the Old Regime vs New Regime

The major advantage of the new tax regime is that it provides lower tax rates. However, it eliminates several deductions including health insurance tax benefits under Sections 80D, 80DD, and 80DDB. Following is an in-depth comparison:

Criteria	New Regime	Old Regime
Tax Rates	Higher rates with deductions and exemptions	Lower rates without most deductions
Section 80D	Up to ₹25,000/₹50,000 for health insurance	Not available
Section 80DD	Up to ₹75,000/₹1,25,000 for disabled dependents	Not available
Section 80DDB	Up to ₹40,000/₹1,00,000 for medical expenses	Not available
Documentation	Requires documentation for tax benefits.	Simpler, less documentation
Ideal for Requirements	Individuals with significant tax-saving investments and eligible expenses	Individuals with simpler financial situations and fewer deductio

The following is a more comprehensive example to understand the difference in tax burden between the two regimes by assuming no deductions or exemptions.

Annual Income	Tax under Old Regime (₹)	Tax under New Regime (₹)	Tax Saving Investments under New Regime (₹)
Up to ₹7,50,000	65,000	31,200	33,800
Up to ₹10,00,000	1,17,000	62,400	54,600
Up to ₹12,50,000	1,95,000	1,04,000	65,000
Up to ₹15,00,000	2,73,000	1,56,000	1,17,000

Choosing the Right Regime for Tax Saving Investments

Before deciding which regime suits your financial condition, consider these factors:

1. Calculate your taxable income under both regimes including all eligible deductions under the old regime to determine which choice provides the most tax relief
2. For a simpler tax filing process with less documentation prefer the new regime. However, if you have considerable tax saving investments, continue with the old regime.

The choice between the old and new tax regimes ultimately depends on your financial condition and preferences. While the new regime streamlines tax filing with lower rates, the old regime’s numerous deductions and notable health insurance tax benefits provide substantial tax relief for people who have made significant tax saving investments with insurance.

Understanding these distinctions and benefits will allow you to make more informed choices about your tax planning and investments. For more tax relief information you can read our blog - Understanding the Impact of Tax-Saving Investments in India.