Section 80D tax benefit for multi-year Health Insurnace Plans

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Currently, under section 80D of the income-tax Act, a resident individual can claim a tax deduction of up to Rs 25,000 in a year

The Union Budget 2018-19 has made certain proposals that could benefit consumers of the health insurance industry, who prefer to pay insurance premiums for multiple years in one year itself.

The Budget 2018 speech, among the other changes proposed in direct taxes reads, "It is proposed to provide that in a case where premium for health insurance for multiple years has been paid in one year, the deduction shall be allowed proportionately over the years for which the benefit of health insurance is available." Let us try and understand the implications of what is said above.

Currently, under section 80D of the income-tax Act, a resident individual can claim a tax deduction of up to Rs25,000 in a year for the medical insurance premiums paid for self, spouse and children, and an additional Rs25,000 for premiums paid for parents.

If the parents are senior citizens and you are paying their medical insurance premiums, you can claim an additional deduction of up to Rs30,000—taking the total deduction to Rs55,000.

A deduction is the first tool to use to reduce your tax liability. It is a reduction from your total taxable income.

The Budget has also proposed to increase the section 80D deduction for senior citizens. Section 80D allows tax deduction for health insurance premiums paid. This has been proposed to be increased from up to Rs 30,000 to a maximum of Rs50,000 now.

So, if you are also paying the health insurance premiums for your senior citizen parents, your deduction limit under this section of the income-tax Act would go up to Rs75,000 from the Rs55,000 earlier.

The benefits proposed in section 80D are in addition to those proposed under section 80C, which can be availed up to a maximum of Rs 1.5 lakh. The 80C benefits cover premium paid for life insurance as well, apart from contributions to retirement investment avenues like the Employees' Provident Fund, National Pension System, Public Provident Fund and tax-saving mutual funds—also called equity-linked savings schemes.

Both the new proposals would take effect from 1 April 2019 and be applicable for assessment year 2019-20.

For someone who is in the highest tax bracket of 30%—the effective income tax rate for whom would now be 31.2%, given that the education cess has been increased to 4%—the tax savings would be up to Rs 15,600, compared to Rs 9,270 now. While this deduction has not been changed for taxpayers other than senior citizens, the proposal to get the claim proportionately in multiple years for single premium policies can be useful. For instance, if your health insurance premium for a sum assured for a family of four (husband, wife and two children) in one year is Rs20,000, you can claim this amount as a deduction under section 80D. However, insurance companies provide a discount if you take the policy for a period of 2 years, and your premium will be less than Rs 40,000 in that case.

Assuming that you get a 5% discount, you would pay Rs 38,000 for the 2-year cover. Under the current rules, you are only allowed to claim a deduction in the first year that too up to Rs25,000 only.

As per proposals in the 2018 Budget, you would be able to claim the total premium paid, proportionately, over the 2-year period, which would mean a deduction of Rs 19,000 in both the years.

However, you must note that in order to claim this tax deduction, you should not have paid the premiums in cash. The benefit is available if payment is made in any manner except in cash. You can pay using any online mode like internet banking, credit or debit cards, or can even pay by a cheque. Also, section 80D deduction benefits are not available to group health insurance premiums paid by your employers.

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