Most financial planners suggest that the first step in any financial plan should be to ensure that one has adequate health insurance. One must get adequate health insurance cover for self and family even before starting to save for one's goals.
What's more, the premium paid for health insurance also provides a tax benefit by reducing your taxable income and thereby your tax liability.
Here are five crucial things to know about tax benefits of health insurance plans as per income tax laws for fiscal 2016-2017.
What are the limits for claiming tax benefits for health insurance
The premium paid towards health insurance policies qualifies for deduction under Section 80D of the Income Tax Act. The benefit is available to individuals on health insurance premium paid for self, spouse, children and parents. Importantly, it does not matter whether the children or parents are dependent on you or not.
The quantum of tax benefit depends on the age of the individual who is medically insured. On the premium paid for self, spouse, children and parents, the maximum deduction that can be availed is Rs 25,000 a year, provided the age of the individual is not above 60.
If the premium paid by an individual is towards health policy for his or her parent who is a senior citizen of age 60 or more, the maximum is capped at Rs 30,000. A taxpayer may therefore maximise tax benefit under section 80D to a total of Rs 55,000 if his age is below 60 while parents age is above 60.
For those tax payer individuals who are of age 60 or more and are also paying health insurance premium for their parents, the maximum tax benefit under section 80D would therefore be a total of Rs 60,000.
For someone buying health cover for self and family and paying Rs 25,000 premium, the amount of tax saved at 10%, 20% and 30% tax rate will be Rs 2,575, Rs 5,150 and Rs 7,725 respectively. This will be over and above anything one saves under section 80C of the Income Tax Act.
Within the maximum limit of Rs 25,000 or Rs 30,000 (as per age), the preventive health check-ups get a benefit of up to Rs 5,000. This means, if you pay premium of Rs 20,000 towards Mediclaim and undergo a health check-up costing Rs 5,000, the total of Rs 25,000 can be availed under section 80D. Most prominent hospitals offer preventive health check up packages. With lifestyle ailments on the rise, it's always better to keep an eye on one's health.
Tax benefit available on all types of health insurance
Both 'indemnity' and 'defined benefit' kinds of health insurance plans would qualify for tax benefit. Not just the indemnity plans such as individual health insurance plan popularly called Mediclaim and Family Floater plans but also defined benefit plans such as daily hospital cash plan and critical illness plan of any standalone health insurance company or a general insurance company would qualify for such tax benefit.
Life insurance companies riders
The Section 80D tax benefit is on the premium paid towards health policy and therefore does not restrict one to buy health plan only from health insurance companies. The premium paid towards critical illness or medical insurance riders in a life insurance policy also qualify for tax benefit under the same section.
Cash payment: One may pay premium in cash, however, in order to avail tax benefit, the income tax rules disallows tax benefit on premium paid in cash. One may however pay by Internet banking, cheque, draft or even by credit card to get tax advantage on premium. However, cash payment for preventive health check up is eligible for section 80D benefit.
Conclusion: It's often said that one should not invest merely for saving taxes. In case of health insurance, which anyhow is not an investment, premium paid not only buys you health cover but also aids in saving taxes. In view of the rising hospital costs, buying a health insurance certainly helps. Lastly, as health insurance plans vary a lot in terms of features, make an informed buying decision