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 the tax benefits of health insurance plans.
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, dependent children and parents.
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 50,000. A taxpayer may therefore maximise tax benefit under section 80D to a total of Rs 75,000 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 1,00,000.
Tax saved
The maximum that one can save under section 80D (Rs 25,000 considered) for those paying 5.20 percent, 20.8 percent and 31.2 percent tax is Rs. 1,300, Rs 5,200, and Rs 7,800 respectively. This will be over and above anything one saves under section 80C of the Income Tax Act.
Health check-ups
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.
If your parents are not covered under health insurance policy and have incurred medical expenses then deduction can be claimed for up to Rs 50,000. Read the full story here.
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.
Point to note
Do keep in mind that from FY 2020-21, an individual can continue with the old/existing tax regime by availing of existing deductions and tax exemptions. He/she also has the option to opt for the new, concessional tax regime without claiming any deductions and tax exemptions. The tax benefits one forgoes by opting for the new tax regime include deductions under: section 80C for a maximum of Rs 1.5 lakh claimed by investing in specified financial products, section 80D for health insurance premium paid, 80TTA for deduction on savings account interest earned from a bank or post office etc.
