Life insurance policies are a must-have, given that they offer much-needed financial security to the dependents of the life assured in case of an untimely eventuality. In addition to the many benefits they offer, life insurance policies also serve as tax-planning tools since policyholders and their nominees are eligible for claiming tax benefits under the provisions of the Income Tax Act, 1961. This article lists the various sections under which you can claim tax benefits if you have a life insurance policy.
Tax Benefits under Section 80C and Section 80CCC of the Income Tax Act, 1961
You can claim tax deductions under Section 80C of the Income Tax Act for premiums that are paid towards a life insurance policy, up to a maximum of Rs.1,50,000. Tax benefits can also be claimed on premiums paid towards retirement or pension policies under Section 80CCC of the Income Tax Act, 1961, up to Rs.1,50,000
Points to Note:
- Tax benefits are available to Hindu Undivided Families (HUFs) and individuals assessees. Individual assessees can include the policyholder themselves, their spouse, and dependent children/parents.
- For policies issued before 31 March 2012, if the total premium paid during the financial year exceeds 20% of the sum assured, tax deduction will only be allowed for premiums up to 20% of the base sum assured amount.
- For life insurance policies issued on or post 1 April 2012, tax deduction will only be allowed for premiums up to 10% of the actual sum assured
- For life insurance plans issued on or post 1 April 2013, tax deduction will be allowed up to 15% of the sum assured if the policyholder suffers from a disability that is specified in Section 80U or is diagnosed with an ailment that is specified in Section 80DDB.
- The above-mentioned tax benefits will be reversed if the insurance cover is terminated within a period of 2 years for traditional policies or 5 years for unit-linked policies from the purchase of the policy.
Tax Benefits under Section 80D of the Income Tax Act, 1961
Premiums paid towards health insurance policies qualify for tax benefits under Section 80D of the Income Tax Act, 1961. If you have purchased any rider/add-on that offers medical insurance coverage along with your life insurance policy, you can claim tax benefits under Section 80D.
Points to Note:
- Tax benefits under Section 80D are available to individual assessees and Hindu Undivided Families (HUFs). Individual assessees can include the policyholder themselves, spouse, dependent parents, and dependent children.
- Tax benefit can be claimed on the premium paid, up to a maximum limit of Rs.25,000. The limit is extended to Rs.30,000 if the insured is 60 years or older.
- An additional tax benefit of Rs.25,000 is allowed if coverage is purchased for one’s parents. This limit is extended to Rs.30,000 if the parent(s) is over 60 years of age.
Tax Exemption under Section 10(10D)
Any sum that you or your nominee may receive through a life insurance policy, including bonuses, is eligible for tax exemptions under Section 10(10D) of the Income Tax Act.
Points to Note:
- Any sum of money that is received under Section 80DD(3) or 80DDA(3) does not qualify for tax exemptions under Section 80D.
- Payouts received via Keyman Insurance Policies are not eligible for tax exemptions.
- For life insurance policies that have been issued on or after 1 April 2003, any payout received apart from the death benefit payout is not eligible for tax exemptions. Also, if the total premium paid during the policy year amounts to more than 20% of the base sum assured, tax exemption will not be offered.
- For life insurance policies that were issued on or after 1 April 2012, tax exemption will only be available if the total premium paid during a policy year does not exceed 10% of the sum assured.
Tax Exemption under Section 10(10A)
For retirement/pension policies, a third of the payout that you receive through the policy at the time of your retirement is exempt from tax.
*Note: Tax laws are subject to change from time to time. Thus, it is advisable to consult a tax advisor or check the latest updates on income tax laws and acts before making taking any financial decisions.
Types of Life Insurance Products That Offer Tax Benefits
You can purchase the following types of life insurance products to avail tax benefits:
- Term insurance policies
- Whole life insurance policies
- Unit-linked insurance policies
- Endowment policies
- Money-back life insurance policies
- Retirement/Annuity plans
- Child insurance policies
Life insurance policies can be purchased through online or offline channels. If you haven’t already bought a life insurance policy, make sure to purchase one at the earliest.