Tax Benefits on Life Insurance Policies

Tax Benefits on Life Insurance Policies

A life insurance policy is a very effective financial product that may protect your family and relatives in hard times. In addition to serving as an investment for protection, life insurance policies are also exempt from taxes under Indian laws, which therefore makes life insurance policies a two-in-one product. These are not only encouraging policyholders to buy life insurance but also engaging in helping policyholders to minimize their tax burdens. The present article discusses the tax benefits on life insurance policies and their limitations.

Overview

A life insurance policy is an arrangement between the policy owner and the insurance company; also, give the policy owner a specified sum in case the policyholder dies during the course of the period of insurance. Some of the policies also include the right for the policyholder to avail some payout if he is alive as per the agreed term of the policy.

In addition to the provision of financial security, the policies of life insurance provide an opportunity to invest, save, and also enjoy the opportunity of having tax incentives. These tax reliefs are contained in the Indian Income Tax Act, 1961, whose policies promote people to plan for their retirements.

Legal Provisions for Tax Deductions on Insurance Policies

The tax benefits associated with life insurance policies can be classified into three primary categories:

1. One of the deductions allowed by the Indian income tax laws is the deduction on the premiums paid (Section 80C).
2. Exemption on Maturity proceeds (Section 10(10D))
3. Any amount paid for medical insurance premiums (except for senior citizens) is eligible for tax deduction under Section 80D.

This is a section of the Income Tax Act of India that allows taxpayers to reduce their taxable income by the amount they pay for premiums on policies.

The Income Tax Act has given policyholders the privilege of excusing the premiums paid to acquire a life insurance policy under Section 80C. This deduction is available to individuals or Hindu undivided families (HUFs).

Eligibility

Available is the deduction for the premiums paid for the following:

• Self
• Spouse
• The type of children may be dependent or independent.

Limit

The overall limit of deduction allowable under Section 80C of the IT Act is ₹1,50,000 in any financial year. This quantum of amount also includes other investible sectors like the Public Provident Fund (PPF), equity-linked savings schemes (ELSS), national savings certificates (NSC), etc.

Conditions

• To qualify for the said deduction, the premium payable cannot be more than 10% of the face value stated in the policy documents for policies purchased on or after 1st April 2012.
• For policies purchased prior to 1st April 2012, there was a full cap in premium not exceeding 20% of the sum assured.

For policies that are taken under section 80U for claiming that the person taking it is disabled, the limit of the premium is 15% of the sum assured, or for the policies taken under section 80DDB for medical expenses taken by the person having disease, which is mentioned in the list, then the limit up to which you can claim the premium is 15% of the sum assured.

Tax Deduction for Rebate u/s 10(10D)

Even on any maturity amount under a life insurance policy, whether received earlier than the policyholder’s demise or at the time of the expiration of the policy, the same is tax-free under Section 10(10D) of the IT Act. This is alongside any extras, if any, that form part of the policy.

Eligibility

• Such exclusion holds for any payout to the policyholder (on maturity) or any legal beneficiary as nominated by the policyholder (on death).

Conditions

• To qualify for tax exemptions for maturity proceeds for the policies taken after 1st April 2012, the annual premium should not exceed 10% of the sum assured.
• Old policies prior to the 1st of April 2012 are allowed to continue with 20% as the minimum retention limit with respect to the sum assured.
• Where this means that the revenue is assessed more than these limits, then the receipt of the maturity proceeds becomes taxable in the hands of the recipient.

Exception

The exemption does not apply to taxed policies, primarily those that provide for the receipt of tax-free maturity proceeds, such as single premium policies that exceed the ratio of premium to sum assured.

Deductions for Expenses on Critical Illnesses or Disability (Section 80D)

They include permanent and term insurance plans and policies bearing health-oriented riders such as critical illness, disability, or terminal illness, all of which can be claimed under Section 80D.

Eligibility

• Health-related riders that are included in the computation of premiums can be deducted from tax.

Limit

• There is a maximum allowance of ₹25,000 under Section 80D for every assesse who is below 60 years.
• Payment made for medicinal usage in case of certain specified diseases, and for senior citizens, the limit is up to ₹50,000.

Other benefits complement the tax-saving allowances under Section 80(C), thus providing extra value to the policyholder and complementing the deductions allowed for the policy.

Tax Relief on ULIPs & Traditional Endowment Policies

Life insurance policies like Unit-Linked Insurance Plans (ULIPs) and Endowment Policies also come with tax advantages:

• ULIPs: ULIPs are those risk management products where the benefits of life insurance are linked with investment choices. The premiums offered incidentally fall under Section 80C, and the maturity benefits fall under Section 10(10D), subject to certain conditions.
• Endowment Policies: These policies offered life cover and savings also. Premiums paid for this product can be claimed as deductions under Section 80C, like in the conventional endowment plan, and its maturity proceeds are exempt from tax under Section 10(10D).

GST on Premium Payments

While life insurance premiums themselves are subject to the Goods and Services Tax at 18%, the tax relief available under Section 80C remains un-impacted by the GST. But the policyholder must keep in mind that GST is applicable to the total investment calculated by the insurance company.

Things to bear in mind when claiming tax advantages

1. Policy Tenure: Make sure this policy remains active for the minimum period: two years in most cases. Consequently, early cancellation could lead to the withdrawal of previously claimed exemptions.
2. Premium-to-Sum-Assured Ratio: Also, look at the ratio to ascertain tax privileges concerning finish of service benefits.
3. Documentation: Keep records of other receipts of premiums to support a claim when preparing the tax returns.

Get Started with TaxDunia

There is no doubt that owning life insurance policies is one of the most important aspects of personal finance, having the dual utility of risk management and tax savings. Reading through Sections 80C, 10(10D), and 80D, policyholders are enabled to make investments that will enhance their tax exemptions whilst ensuring their families’ futures. In today’s rising cost of living, coupled with future economic indecisiveness, it is indeed a wise decision to invest in a life insurance policy. Reach out to TaxDunia to claim the best deductions available under the various sections of income tax.