In these highly unprecedented times, it has become more important than ever to have a life insurance policy.
With your presence, you can fulfil all the financial responsibilities that you may have as the primary earning member of your family. A life insurance policy gives the assurance that these responsibilities will be taken care of, even in your absence. Besides the security of the life cover, there are various other benefits that one gets to enjoy when they buy life insurance. Prominent among these are the tax benefits. To encourage more people to opt for life insurance, relevant authorities have provided a slew of tax benefits, mostly under Section 80C and Section 10 (10D) of the Income Tax Act, 1961.
Tax deductions under Section 80C
Deductions against premiums
Section 80C is the most beneficial for insurance-holding taxpayers. The life insurance tax benefits under this section can be claimed by individuals as well as Hindu Undivided Families (HUFs). Under this Section, the premiums that you pay towards your life insurance policy can be claimed for deductions in your ITR. The maximum deductions one can be eligible for is Rs 1.5 lakhs. Also, note that this deduction is allowed on life insurance policies bought with private insurers as long as they are registered with the IRDAI.
Terms and conditions on tax deductions
- To claim the deductions on premiums of policies bought before 1st April 2012, the annual premium amount should not exceed 20% of the sum assured amount.
- For policies issued after 1st April 2012, the annual premium amount should not go over 10% of the sum assured.
- Under this section, the term ‘sum assured’ refers to the life cover of the policy, that is the minimum amount the policyholder’s family will receive on their demise, and not to the maturity amount, any other bonuses, other claims amounts, and so on.
Life insurance tax benefits under Section 10 (10D)
Exemptions from taxation on pay-outs
The life cover that the nominee/s receive/s when the policyholder passes away under conditions specified in the policy is exempted from taxation under this Section. It also allows tax exemptions on maturity proceeds from your life plan. Additionally, if you have a ULIP plan and are receiving regular returns and making withdrawals on the same, then those withdrawals, too, are tax exempted. One can also enjoy a tax-free surrender value pay-out if they surrender the policy after the lock-in period is complete.
Terms and conditions on tax exemptions
- The tax benefits of a ULIP can be reversed and counted as total income if the policyholder surrenders the policy before the lock-in period of five years ends.
- The exemption on maturity amount is allowed only if:
- The annual premium does not exceed 10% of the sum assured for a policy bought after 1st April 2012
- The annual premium does not exceed 20% of the sum assured for a policy bought before 1st April 2012
- Note here that the ‘sum assured’ here may refer to the maturity amount, as well as the accrued bonus, and not just the minimum life cover.
Tax benefits under Section 80D
When you buy life insurance, do consider getting the critical illness rider, too, as the premium that you pay towards this rider is eligible for deductions under Section 80D of the ITA, 1961. This section is primarily focused on health insurance and hence helps reduce your tax liability when you buy the critical illness rider.
Important things to remember about life policy tax benefits
- For policies issued after 1st April 2013 for an individual with a disability specified under Section 80U or diseases specified under Section 80DDB, the annual premium should not exceed 15% of the sum assured to be eligible for life insurance tax benefits.
- The tax benefits you are eligible for also depend on the tax regime you have chosen. The deductions and exemptions mentioned here may not prove to be beneficial if you have opted for the new tax regime.
You can use a life insurance premium calculator to plan out your tax-saving strategy. This tool gives you an estimated premium based on factors such as the sum assured, tenure, age, gender, and so on. With some help from the life insurance premium calculator and a tax consultant, you can create a long-term tax strategy that maximises your tax saving.