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FAQs: Tax Benefits of Life Insurance

April 3, 2018
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FAQs: Tax Benefits of Life Insurance

The income tax department of India allows a reasonable deduction of tax payment for those who invest in life insurance policies. So, a good way to minimise the payment of hefty income tax towards the end of a financial quarter or year is to sign up for a life insurance policy. Even if you are a businessman or a salaried employee, you can invest in life insurance and become eligible for tax deductions, every financial year.

Here you will understand how tax exemptions work and more importantly when they do not work. Presenting below are some of the frequently asked questions related to life insurance policies:

  1. What are the tax deductions on premiums paid for a life insurance policy under section 80c?

Tax deduction under Section 80C of the Income Tax Act allows exemption up to Rs.1.5 lakh per annum. However, there are few things to keep in mind:

  • For the life Insurance policies issued before 31st March 2012, the tax deduction is available only for the total premium amounting to a maximum of 20 percent of the sum assured
  • If the policies are issued on or after 1st April 2012, the tax deduction is applicable only for the total premium up to 10 percent of the sum assured
  • If the life insurance policy issued on or after April 1, 2013, is in the name of any person suffering from a disability (as referred in section 80U) or suffering from an ailment (as mentioned in section 80DDB), the maximum deduction is up to 15 percent of the sum assured
  1. How can you avail the tax-benefits?

You can claim tax benefit on premiums paid towards life insurance policies of yourself, your spouse, your dependent children. But even if you have invested more than Rs 1.5 lakhs in total in these investments, including the premium paid for your own policy, only Rs 1.5 lakh can be claimed as a deduction from your taxable income.

  1. Who all can avail the tax benefit on premium paid for a life insurance policy?

An Individual or a Hindu Undivided Family (HUF) can only get the tax benefits on premium paid for life insurance.

  1. What are the tax benefits on the maturity amount or claim benefits paid to the nominee?

The life insurance payouts received is exempted from tax under Section 10 (10D) of the Income Tax Act. This includes:

  • Death benefit paid to the nominee or
  • Maturity benefit as a survival benefit to the insured, including bonuses if any

Yes, the maturity amounts are completely exempt from tax. However, the payouts are not tax exempted under the following cases:

  • Any amount received under Section 80DDA (3) or Section 80DD (3)
  • Any amount that has been received under the Keyman insurance policy
  • Any amount received that is not a part of the death benefit for an insurance policy issued on or after April 1, 2003, but on or before 31st March 2012
  • If the total premiums paid during the policy term are more than 20% of the total sum assured received.
  • In case the term insurance policy is issued on or after April 1, 2012, then the exemption is applicable only if the total premium paid doesn’t exceed 10% of the sum assured.

Conclusion:

One of the most important things to be considered while purchasing a life insurance policy is to make sure that the policy is bought from a reputed company. The company should be one that has been in existence for a good five to ten years at least.

The next step is to determine the premium for the policy. Many insurers help you calculate the same with monthly income calculator or premium calculators on their websites. This will help you analyse how much cover you can take and how will the premium vary accordingly.

At the same time, it is vital that you have a thorough knowledge of the provisions while filing your tax returns or claiming tax from life insurance policies. So, go for best monthly income investments and get tax benefits.

Happy Tax Saving!