What are the Tax Benefits on Life Insurance?

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Life insurance is widely used to ensure the financial well-being of one’s dependents in case of an uncertain happening or mishap. Life insurance companies agree to pay a specific amount, or the sum assured, to the nominee of a policy in case of the policyholder’s passing away during the term of the plan. If the policyholder survives the policy term, insurance plans like endowment or money-back or whole life insurance plans, pay the policyholder a maturity value benefit.

Many people also use life insurance policies to save regularly and build a corpus that can be used to fund their long-term goals like buying a home, funding a child’s education or marriage, or saving for retirement. The use of a life insurance premium calculator can help in finalising the policy and premium amounts. Among the several benefits that investors get when they buy life insurance is also the benefit of tax saving. Tax benefits associated with life insurance policies attract thousands of investors to buy policies before the end of a financial year. Let us find out more about these benefits.

Tax Benefits on Insurance Premiums

The Income Tax Act 1961 contains certain provisions that offer tax benefits to people buying life insurance policies. These benefits relate to the premiums paid as well as the maturity or the assured amount paid at the end of the policy to the policyholders or their beneficiaries.

Benefits Under Section 80C

  • All insurance premiums paid to insure the life of self or the life of a spouse or child are eligible for deduction from taxable income under Section 80C of the Income Tax Act. The deduction is subject to a total limit of Rs 1.5 lakhs in all tax-saving investments and payments like repayment of housing loans, PPF, etc.
  • The life insurance policy can be taken from any life insurance provider who has been approved by the Insurance Regulatory and Development Authority of India. Also, the deduction can be claimed by both an individual as well as HUF.
  • One condition that is applicable for getting this benefit is that the premium paid in a year should not exceed 10% of the sum assured if the policy has been issued after 1st April 2012. In the case of policies issued before 1st April 2012, the limit is 20% of the sum assured.
  • In the case of a policy issued after 1st April 2013 for covering the life of a person with a disability as referred under Section 80U or a disease referred to under Section 80DDB, the requirement for claiming the deduction is that the premium should not exceed 15% of the sum assured.
  • In a case where the policyholder surrenders his policy or the same gets terminated two years from the beginning of the policy, no taxation benefit is available on the premium payments. The benefits are reversed if the policy ceases to be in force within five years for Unit Linked Insurance Plans or ULIPs.

The sum assured refers to the minimum amount that is assured to be paid to the policyholder or the survivor. This amount, however, does not include any premium that the insurance company has agreed to return or any payment of bonus on the policy. The sum assured and the premium amount can be decided with the help of a life insurance premium calculator.

Benefits Under Section 10D

As per the Section 10D of Income-tax Act, maturity proceeds or the bonus received on account of a life insurance policy, is exempt from income tax if the annual premium paid towards the policy does not exceed 10% of the sum assured for policies after April 2012, 20% for policies issued before April 2013, and 15% for policies issued after April 2013, on the life of people with a disability or disease as specified under Sections 80U and 80DDB, respectively.

In case the maturity proceeds of a life insurance policy (which is not eligible for exemption under Section 10D) exceed Rs 1,00,000, the insurance company will deduct a TDS or tax deducted at the source of 1% if the PAN of the policyholder is available.

However, if the amount received is less than Rs 1,00,000, no TDS will be deducted by the insurance company, but the amount received is fully taxable as “Income from Other Sources.”

To conclude, it is a good idea to buy a policy to secure the financial future of your loved ones besides enjoying the tax benefits of life insurance.