Life Insurance For Income Tax Exemption

• Reduce taxable income by up to Rs. 1,50,000 deduction under section 80C**
• Convenient payment options - annual, half-yearly, quarterly or monthly premium payments
• Do more with plans that offer pure protection, retirement planning and investment options

Life insurance policies, offered by various life insurance companies in India, qualify for tax benefits under the Income Tax Act, 1961. This is an added advantage to a life insurance product that offers life cover to the individual. While various tax-saving instruments are available, life insurance policies are convenient and come with the basic feature of financial protection against death.

It is important to understand how tax benefits can be availed from life insurance policies so that one does not lose out on the benefits later on.

Life insurance tax benefits under section 80C of the Income Tax Act

According to section 80C(2), any amount paid to the insurance company to purchase or to continue a life insurance policy can be claimed by the policyholder as a deduction from the gross total income of the individual. This implies that the premiums paid towards a life insurance policy to keep it in force can be deducted from the individual’s gross total income under certain conditions. The taxable income is calculated after the deductions.

Who can enjoy tax benefits for the premium paid towards a life insurance policy?

An individual or a Hindu Undivided Family (HUF) who pays premiums qualify for tax benefits under section 80C.

What is the maximum cap of deduction that can be claimed under section 80C of the Income Tax Act?

According to the prevailing tax laws, a maximum of Rs.1.5 lakh can be deducted from an individual’s taxable income under section 80C. It is to be noted that there are various investment options that are eligible for tax deduction under section 80C. Hence the total maximum deduction from all the investments put together is Rs.1.5 lakh.

Also, benefits that can be availed under section 80CCC and section 80CCD will be clubbed with the benefits under section 80C. Therefore, the total maximum deduction permitted under all the above-mentioned sections is Rs.1.5 lakh.

What is the maximum premium that is allowed to be claimed?

According to section 80C(3) of the Income Tax Act, if a life insurance policy was purchased on or before 31.03.2012, only an amount equal to 20% of the actual sum assured is available for deduction from the gross total income. The premium amount that exceeds 20% of the actual sum assured is not eligible for deduction. The actual sum assured is defined as the least sum assured amount over all policy years and does not include any bonuses or premiums to be returned to the policyholder.

Life insurance policies that were bought on or after 01.04.2012, qualify for a premium deduction of an amount equal to only 10% of the actual sum assured. This indicates that if the value of premiums paid by the individual is above the value of 10% of the actual sum assured, deduction only to an extent of 10% of the actual sum assured is available.

For individuals who suffer from severe disease or disability and who purchased the policy on or after 01.04.2013, the maximum deduction limit is 15% of the actual sum assured. To avail this benefit, the individual should have suffered a disability as mentioned under section 80U or disease as mentioned under section 80DDB.

Can benefits under section 80C be availed for spouses and children?

Yes, an individual can buy life insurance policies for himself/herself, his/her spouse, and his/her children. Life insurance policies can be bought for any number of children – married, unmarried, minor, major, or adopted. As long as the policy is bought by the individual and he/she pays the premiums, he/she can enjoy tax benefits under section 80C of the Income Tax Act, 1961. In the case of HUF, the policy can be bought under the name of any of the family members to enjoy tax benefits.

Is there a lock-in period for a life insurance policy to enjoy tax benefits under section 80C?

Section 80C specifies the minimum lock-in period of the life insurance policy in order to be eligible for tax benefits. The lock-in periods are as follows:

• 2 years for single premiums life insurance plans
• 5 years for ULIPs (Unit linked insurance plans), for which premiums have been paid from the inception of the policy
• 2 years for all other life insurance plan types for which premiums have been paid from the beginning

Policyholders need to be aware that if an individual surrenders a policy or his/her policy is terminated due to non-payment of premiums, then he/she cannot avail tax benefits under section 80C. This denotes that the premiums paid towards the policy will not qualify for a tax deduction in the year when the policy was surrendered or terminated. Further, deductions that were claimed in the previous years will be considered as income in the financial year when the policy is surrendered or terminated.

Life insurance tax benefits under section 10 (10D) of the Income Tax Act

According to section 10 (10D) of the Income Tax Act, 1961, the maturity benefit and surrender benefit paid to the policyholder are tax-free, subject to certain conditions.

Under what conditions are life insurance policy benefits taxable?

According to section 10 (10D) of the Income Tax Act, 1961, if the premium payable in any of the policy years exceeds 20% of the actual sum assured for a policy issued on or after 01.04.2003 but on or before 31.03.2012, the benefits would be taxable.

Further, if the premium amount payable in any of the policy years is above 10% of the actual sum assured, and the policy was issued on or after 01.04.2012, the benefits received by the policyholder will be taxable.

In case the insured individual suffers from severe disease or disability as specified under the Income Tax Act and the date of issuance of the life insurance policy is on or after 01.04.2013, and the premium payable in any of the policy years is above 15% of the actual sum assured, the benefits will be taxable.

While benefits received by the policyholder are taxable if the premium payable exceeds the above-mentioned percentages, the death benefit received by the nominee will be tax-free for the nominee.

Are Keyman insurance policies tax-free?

Firstly, a Keyman insurance policy is an insurance policy that is purchased by an individual for his/her employee or for an individual who is connected to his/her business. According to section 10 (10D) of the Income Tax Act, 1961, the proceeds of a Keyman insurance policy are not tax-free.

Will TDS be applicable to benefits received from a life insurance policy?

According to section 194 DA, any benefit provided by a life insurance company to an insured individual is subject to TDS (Tax deducted at source) at the rate of 2%, unless the benefit is tax exempted under section 10 (10D). Hence, proceeds under a life insurance policy that are tax-exempted will attract no TDS. Further, proceeds that are not tax-exempted under section 10 (10D) but are not above the value of Rs.1 lakh will also attract no TDS.

While members who have submitted their PAN details to the insurance company will have to pay only 2% TDS on non-tax exempted proceeds, members who have not submitted the same will have to pay 20% TDS.

Final word

Tax benefits and exemptions offered by life insurance policies drive individuals to buy such insurance policies. However, it is important to remember that a life insurance policy is meant to provide financial protection to one’s family members. Therefore, one should consider this objective while purchasing a life insurance policy and avail adequate life coverage that will aid family members in times of need.