How Life Insurance Helps You Save Income Tax

Although life insurance is seen mainly as a protection product, one of the biggest financial advantages of it is often overlooked — income tax savings. By purchasing eligible life insurance policies, you may actually be able to legally reduce your taxable income under Nepal’s Income Tax rules saving you thousands of premium that is to be paid for taking a life insurance policy.

Understanding Tax Deduction on Life Insurance in Nepal

According to Nepal’s Income Tax Act (2002), individuals can claim deductions on eligible life insurance premiums up to the limit prescribed by the Nepal Insurance Authority (NIA) which is Rs 40,000 on your annual income.

This deduction reduces your taxable income, meaning the tax is calculated on a smaller amount.

So how do we calculate this tax deduction? We calculate it on the Taxable Income.

Taxable Income=Annual Income−Allowed Deductions

Taxable Income Calculation (Example 1)

Annual income=900,000

Life Insurance Premium (annual)= 25000

Taxable Income= 900,000-25000= 8,75000

Hence, tax can now be calculated in the new amount = Rs.875,000

Taxable Income Calculation (Example 2)

Annual income=900,000

Life Insurance Premium (annual)= 65,000

Even though you paid 65,000 the maximum deduction that is allowed is 40,000

 So, Taxable Income= 900,000-40,000= 8,60,000

Hence, tax can now be calculated in the new amount = Rs.860,000

What you need to understand is: You don’t save 40,000 every year in actuality your taxable income is saved by upto 40,000 per year. So that brings us to an important question:

How much do I save in premium annually?

Before that it is important to consider that- your savings depend upon the following 3 factors

Nepal Income Tax Slabs (Individual)

The last major update in Nepal’s income tax slabs were implemented on July 16, 2024 as follows:

For Individual Taxpayers (Illustrative Structure)

Because Nepal follows a progressive tax system (The more income you earn, the higher the tax rate applied to the extra portion of your income, reducing taxable income through deductions can reduce tax payable significantly.

So how does Life Insurance Reduce Tax?

The government calculates your income tax on a smaller amount after deducting eligible life insurance premiums. Let’s see a comparison of how it impacts your savings.

Real Tax Saving Example 1: Salaried Employee

Some hidden advantages

1. You pay less premium Taking the previous example alternatively this also means you are paying less premium every year. Though you are paying an annual premium of 40,000, you are actually only paying 40,000-8000= 32,000 for the same Insurance policy.

2. Death benefits are generally tax efficient for the family.  You may save tax during premium payment years as well as when the insured person passes away during the policy term, the nominee/family receives the death claim amount, and they may receive favorable tax treatment under prevailing laws. Hence, you create a dual tax advantage.

Practical Example

• Suppose your father buys life insurance with NPR 50 lakh coverage

• Pays premiums yearly

• Also gets yearly tax deduction benefit

If he unfortunately passes away then the family receives NPR 50 lakh death benefit and this money helps cover: Home expenses, child education, loans and emergency financial needs

So the same policy helped:

1. Save tax during his lifetime

2. Provide financial protection later

That is why life insurance is often called a “Dual-benefit financial tool.”

Conclusion

With proper planning, life insurance can help you:

• Reduce taxable income

• Save yearly taxes

• Protect your family

• Build future savings

• Create long-term financial stability

However, tax saving should be viewed as an additional benefit — not the only reason to purchase a policy!

Here, explore some popular plans at sajilobima.com today that provide tax benefits. Also chat with our AI advisor below to understand more about this topic!