Definitive Guide to Tax Benefits on Health Insurance

The Definitive Guide to Tax Benefits on Health Insurance for FY 2021-22

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Health insurance is an essential instrument to protect yourself against the rising costs of good quality medical treatment. Unforeseen hospitalization expenses for treatment of accident injuries and diseases can drain your savings without health insurance coverage. Thus, health insurance is not a luxury but a necessity for people.

Apart from protecting your savings, taking a health insurance policy also gets you a significant deduction on your taxable income. Tax benefits on health insurance are possible because Section 80D of the Income Tax Act, 1961, provides deductions on health insurance.

What Is Section 80D?

Section 80D of the Income Tax Act, 1961 provides tax deductions on the premiums paid for health insurance policies in a financial year. Deductions can be claimed irrespective of whether you have purchased the policy for individuals, families, or parents. Tax benefits are available for both short and long-term health insurance coverage. Besides the premiums, Section 80D also provides deductions on preventive health check-ups and medical expenditures incurred on senior citizens.

In the case of short-term health insurance plans for which the premiums are paid annually, the deductions are provided for the premium paid in each financial year. However, in the case of long-term health insurance coverage for which a lump-sum premium is paid, deductions are allowed on a proportionate basis. For example, if you have paid the premium for the entire policy term in the first year itself – then you will be able to claim deductions for that policy only in that year. The deductible amount is calculated by dividing the lump sum premium amount by the number of years for which the said policy is active. The best long-term health insurance plans are a blend of high coverage and good tax benefits.

Eligibility for Tax Deductions Under Section 80D

Tax benefits on health insurance can be claimed under Section 80D for premiums paid on an annual basis for short-term health insurance plans or lump sum premiums paid for long-term health care plans providing coverage for 2/3 years at a stretch.

Health insurance policies purchased for self, spouse, children, and parents come under the ambit of Section 80D and are eligible for deductions. Tax deductions can also be claimed for a health insurance policy purchased for Hindu Undivided Family or HUF members. Apart from citizens of India, NRIs are also eligible for claiming tax deductions on health insurance premiums.

Check Eligibility for Tax Deductions Under Section 80D

Tax benefits on health insurance under Section 80D apply to both indemnity-based and defined benefit health insurance plans. Under an indemnity-based plan, the cost of medical treatment is reimbursed up to the limit specified by the policy. On the other hand, the defined benefit plan pays the entire sum insured to the policyholder in the event of a pre-defined condition setting in such as critical illness. Tax deductions can be claimed regardless of whether you have purchased an indemnity plan or defined benefit plan.

Tax Benefits on Health Insurance (Deductions Available Under Section 80D)

Tax Benefits on Health Insurance for Individual and Family

The maximum deduction which can be claimed on the premiums paid for either short term or long-term individual health insurance plans is Rs. 25,000/-. Even if the family consisting of spouse and children are also included in the health insurance policy, the deduction remains Rs. 25,000/-.

Tax Benefits on Health Insurance for Individuals and Parents Below 60 Years

Both short and long-term health care plans provide a maximum deduction of Rs. 50,000/- if parents are also included in the policy along with spouses and children. This is because of an additional amount of Rs. 25,000/- is provided for parents apart from Rs. 25,000/- for self and family.

Tax Benefits on Health Insurance for Individuals and Families Below 60 Years but Parents Above 60 Years

Age is an important factor in deciding how much tax benefits on health insurance one can enjoy. Senior citizen parents included in a short or long-term health insurance policy get a deduction of Rs. 50,000/-. Thus, if you purchase a health insurance policy for yourself, your family, and your senior citizen parents, the deduction you can claim is Rs. 25,000 + Rs. 50,000, which amounts to Rs. 75,000/-.

Tax Benefits on Health Insurance for Both Individual Families and Parents Above 60 Years

Senior citizens who have purchased short or long-term individual health insurance plans are eligible for a tax deduction of Rs. 50,000. If senior citizen parents are also included in such plans, then Rs. 50,000 deductions applicable to them are added to the Rs. 50,000 deduction provided to the senior citizen policyholder, and the total deduction rises to Rs. 100,000/-.

It must be noted that even if your parents have a separate health insurance policy but you are paying the premium for it, even then you will be eligible for tax benefits for this particular policy.

Another important point is that long-term health insurance coverage also has a tax deduction limit of Rs. 25,000 for individuals aged below 60 years and Rs. 50,000 for individuals aged above 60 years.

Let’s consider some examples to illustrate the above-mentioned conditions.

  • Mukesh is aged 40 and pays an annual premium of Rs. 20,000 for a health insurance policy covering him and his wife. He also goes for preventive health check-ups and spends Rs. 4000 on the same. Thus, the total tax deductions he is eligible for is Rs. 24,000.
  • Neha is aged 35 and pays a health insurance premium of Rs. 24,000 for a policy covering self, spouse, and children. In addition, she pays a premium amount of Rs. 25,000 on behalf of her non-senior citizen parents for their health insurance policy. Thus, she gets a tax deduction of Rs 24,000 + Rs, 25,000 which amounts to Rs. 49,000.
  • Gaurav is aged 45 and pays a health insurance premium of Rs. 35,000 for a policy covering himself, wife, and child. He also bears the premium of the health insurance policy covering his senior citizen parents, amounting to Rs. 55,000. Thus, the total tax deductions he is eligible for is Rs. 25,000 + Rs. 50,000 amounting to Rs. 75,000. He is, therefore, required to pay tax on only Rs. 15,000 out of a total premium of Rs. 90,000 paid by him.
  • Mohan is a senior citizen himself and pays a health insurance premium of Rs. 40,000 for himself and his family. He also pays a premium of Rs 45,000 for the health insurance policy of his senior citizen parents. Thus, he gets a tax deduction of Rs. 85,000 since the limit is Rs. 50,000 each for Mohan and his parents.

Deductions Allowed for Preventive Health Check-Ups

Tax deduction on preventive health check-ups is also allowed by Section 80D for both short and long-term health care plans. Preventive check-ups can be of self, spouse, children, or parents. The maximum deduction allowed for preventive health check-ups is Rs. 5000/-. This limit is applicable for the whole family included in the policy. For example, if you are getting a tax deduction of Rs. 25,000 on the premium paid for your health insurance policy and also opt for preventive health check-ups for self, spouse, children, or parents, the total deduction which you can claim is Rs. 30,000/-.

Preventive Health Check-Ups

For senior citizens, both short and long-term health insurance coverage carries a tax deduction limit of Rs. 7000/- on preventive health check-ups. Thus, if you are paying the premium for your senior citizen parents and have opted for their preventive health check-ups, then the total tax deduction you can claim is Rs. 25,000 + Rs, 7000 amounting to Rs. 32,000/-.

Exclusions Under Section 80D

  • Group health insurance provided by companies including both short and long-term individual health insurance plans or family insurance policies is not eligible for tax deductions as far as the insured employees are concerned. Since the company pays the premium for a group health insurance policy, any individual employee covered under it cannot claim tax deductions. However, if an employee opts to pay an additional premium amount instead of extra benefits, then they can claim a deduction on the amount paid.
  • Health insurance premiums of short or long-term health care plans paid on behalf of grandparents, siblings, or working children are not eligible for deductions under Section 80D. Premiums paid on behalf of other relatives covered under a different policy than the one purchased by the taxpayer cannot be claimed for tax deductions.
  • Cash payments made for premiums of short or long-term health insurance coverage are not covered under Section 80D. This means if you are paying the premium in cash, you cannot claim tax deductions on it. Health insurance premiums need to be paid by cheque, net banking, or credit/debit card to claim deductions under Section 80D. However, a deduction on preventive health check-ups can be claimed even if the payment is made in cash.
  • GST and cess charges on premium amounts must be excluded when calculating the premium eligible for tax deductions under Section 80D. Service charges also do not come under the ambit of tax benefits on health insurance.

How to Claim Deductions Under Section 80D?

The only documents required to claim tax deductions under Section 80D irrespective of short or Long term individual health insurance plans or family health insurance plans are the receipt of the premium paid and the policy document carrying the name of the taxpayer and the names and relations of the family members to the taxpayer in case of the family health insurance policy. In case you are paying the premium for your parents’ health insurance, you need to get the Section 80D certificate from the health insurance provider by furnishing payment details in your name.

Claim Deductions Under Section 80D

In the deductions column on the ITR form, select Section 80D from the drop-down menu. After that, select the particular condition under which you are claiming the deduction. The seven conditions listed are self and family, self (above 60 years) and family, self and family with parents, self and family with parents (above 60 years), self (above 60 years), and family with parents (above 60 years), parents and parents (above 60 years). Attach the required documents to complete the process.

Difference Between Deductions Under Section 80D and 80C, 80DDB and 80DD

As discussed, Section 80D provides for tax deductions on premiums paid for short and long-term health care plans ranging between Rs. 25,000 and Rs. 100,000 depending upon conditions. Section 80D should not be confused with other sections such as Section 80C, 80DD, and 80DDB. An understanding of these sections prevents any confusion.

Section 80D provides for tax deductions on premiums paid for short and Long term health care plans ranging between Rs. 25,000 and Rs. 1,00,000 depending upon conditions.

The maximum deduction under Section 80D is Rs 1 Lakh.

Section 80C provides tax deductions on multiple investments such as life insurance premiums, mutual funds, savings schemes, and more.

Section 80C has a maximum limit of Rs. 1.5 lakhs.

Section 80DD provides tax deductions to individuals or families caring for disabled persons. The deductions can be claimed by the family or individual caring for the disabled dependent and not by the disabled dependent. Tax deductions are provided on the expenses incurred on maintaining the disabled dependent or the premium paid to the insurance company providing coverage for the maintenance of the disabled dependent.

Section 80DD provides a deduction of up to Rs. 75,000 in case of 40% disability while the limit increases to Rs. 1.25 lakh in case of 80% or more disability.

Section 80DDB provides tax deductions on the expenses incurred on the treatments of specific diseases. These include ataxia, dementia, Parkinson’s disease, chorea, motor neuron disease, hemiballismus, malignant cancers, chronic renal failure, AIDS, Thalassemia, Haemophilia, and more.

Tax deduction up to the limit of Rs. 40,000 or the amount incurred on medical treatment of the condition, whichever is lower, is provided. Senior citizens can claim deductions on the actual amount paid for the medical treatment or Rs. 1 lakh, whichever is lower. A certificate attesting that the said individual is suffering from a disease covered under the section is necessary to claim deductions under Section 80DDB.

Points to Remember While Buying Health Insurance

  • It must be kept in mind that even the best long-term health insurance plans do not provide more tax deductions on lump sump premium amounts than short-term health insurance plans. The tax deductions range between Rs. 25,000 and Rs. 50,000 and can go up to Rs. 1,00,000 for both body long and short-term health insurance plans.
  • Best long-term health insurance plans provide discounted premiums because the coverage is spread over multiple years. In addition, you get income tax deductions on Section 80D on the lump sum premium amount as well. However, the deductions are calculated proportionately per the number of years for which the premium has been paid.
  • Income tax deductions cannot be claimed on a premium paid for the health insurance policy purchased by your mother-in-law and father-in-law. This is because the parents of your spouse are not considered to be your own parents under Section 80D. Thus, even if you pay the health insurance premium for your in-laws, it cannot be claimed for deductions under Section 80D. The best solution is for your spouse to pay the premium on behalf of their own parents and claim deductions on their taxable income.
Calculate Health Insurance Tax Benefits
  • Even if your parents and spouse are not dependent upon you, but you pay the health insurance premium covering them, you are also eligible to claim tax benefits on the said premium amount. However, you cannot claim deductions on the premium paid by you on behalf of your independent children.
  • The best long-term health insurance plans or best short-term health insurance plans are the ones that reputed companies offer. To be sure that you shall get good health insurance coverage and get tax deductions without hassles, it is necessary to make sure that the said health insurance provider is in this sector for at least 5-10 years.
  • If you have purchased multiple health insurance policies, you can claim tax deductions on the premium amount paid for each policy. You simply need to keep the premium paid up to date for each policy and meet each policy’s terms and conditions.
Senior Citizen Health Insurance
  • Budget 2018 has amended Section 80D. This amendment holds special significance for senior citizens. The amended section allows deductions on medical expenses incurred on the treatment of senior citizens without health insurance. Thus, senior citizens who cannot purchase health insurance due to high premiums or pre-existing diseases can now claim tax deductions for their medical treatment. The children of senior citizens bearing the medical expenses can also claim tax deductions on the expenses. Deductions on the medical expenses of a senior citizen can be availed only if the senior citizen is not covered under any health insurance. Health insurance policies for senior citizens have a limit of Rs. 50,000.
  • The best long-term health insurance plans provide critical illness coverage while enabling the policyholders to claim tax deductions under Section 80D. It is better to opt for such plans from reputed insurers. A careful reading of the policy document is also necessary to clarify the deductions you can claim.
  • Tax deductions on health check-ups do not exceed Rs. 5000 and Rs. 7000 in the case of senior citizens. The limit is applicable overall and does not apply individually.
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