Tax Benefits of Life Insurance Policy - You Need to Know

Life insurance policies are useful tax planning tools as the policyholder is eligible for tax benefits under the Income Tax Act 1961 (Act) of India. Among the multiple modes for saving tax, life insurance is one of the most effective tax planning instruments.

What are the Tax benefits of Life Insurance policy?

To highlight, there are two types of income tax benefits available to individuals concerning the savings being made in the Life Insurance policies:

Deductions

Exemptions

80C/80CCC

• Benefit is available to Individual assessee and the Hindu Undivided Family (HUF) assessee.
  • In case of individual assessee - Himself/herself, spouse, children of such individual
  • In case of HUF assessee - any member of HUF
• If the amount of premium paid in a financial year for a policy is in excess of 20% of the actual capital sum assured, then, deduction will be allowed only for premiums upto 20% of the sum assured.
• For insurance policies issued on or after 01 April 2012, tax deductions are applicable of the amount of premium paid in a financial year is 10% of the sum assured (15% of actual capital sum assured in case of person with severe disability or specified ailment).
• Section 80CCC - Maximum amount of deduction that an assessee can claim under Sections 80C, 80CCC will be limited to INR 150,000.
• For life insurance policies issued before 31st March 2012, deductions are applicable if the amount of premium paid in a financial year is 20% of the sum assured amount of the policy.

Section 80C(5) - if the insurance policy holder voluntarily surrenders his policy or in case the policy is terminated before 2 years from the date of commencement of policy, then the insured will not receive any benefits on the premium paid, offered under Section 80C of Income Tax Act.

10 (10D)

When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 01 April 2012 and 20% of sum assured for policies issued before 01 April 2012, any amount received on maturity of a life insurance policy or amount received as bonus is fully exempt from Income Tax under Section 10(10D).

Also, included are policies taken after 01 April 2013, on the life of a person with a disability or a disease specified under Sections 80U and 80DDB respectively, where the amount received on maturity is tax-free provided the premium paid does not exceed 15% of the sum assured.

For insurance policies issued on or after 01 April 2012, exemption would be available for policies where the premium payable for any of the years during the term of the policy does not exceed 10% of the actual capital sum assured.

However, there are few exceptions:

• Sum received under Section 80DDB, or
• Sum received under a Keyman Insurance Policy, or
• Sum received other than as death benefit under an insurance policy which has been issued on or after 01 April 2003 and if the premium payable in any of the years during the term of the policy does not exceed 20% of the sum assured.

80D

• Benefit is available to Individual assessee and Hindu Undivided Family assessee.
  • In case of individual assessee - Himself/herself, spouse, dependent children and parents of such individual
  • In case of HUF assessee - any member of HUF
• Qualifying amounts under Section 80D for self, spouse and dependent children is upto INR 15,000/- and additional deduction upto INR 15,000/- for the parents. However, a higher amount of upto INR 20,000/- is permitted for parents, if they are senior citizens. Assessee can make any payment on account of preventive health check-ups upto INR 5,000 within prescribed overall limit.

80DD

• Premiums paid for disabled dependent are eligible for deduction up to INR 50,000 every year.
• A higher deduction of INR 75,000 shall be allowed, where such dependent is a person with severe disability.
• If life insurance is issued on or after 01 April 2013, in the name of any person suffering from a disability as mentioned in section 80U or suffering from an ailment as referred in section 80DDB, the maximum deduction is up to 15% of the sum assured.

Any maturity amount of life insurance policy or bonus amount received by the beneficiary of the policy in c

To clarify any doubts, the premium paid towards a life cover taken with any insurer that is approved by the Insurance Regulatory and Development Authority of India (IRDAI) is eligible for a Section 80C deduction.

Further, the different types of Life Insurance that help you save tax are as follows: -

• Term Plan (pure risk cover)
• Unit-linked insurance plan, ULIP (Insurance + Investment opportunity)
• Endowment Plan (Insurance + Savings)
• Money-Back (Periodic returns with insurance cover)
• Whole Life Insurance (Life coverage to the life assured for entire life)
• Child's Plan (For fulfilling your child's life goals like education, marriage, etc.)
• Retirement Plan (plan your retirement and retire gracefully)

So, before finalising any life insurance policy, it is imperative to understand the latest information about the various tax-saving instruments under the sections in the Income Tax Act through agents or premium calculators.