[Last Update : 14-Oct-2017]
There is a general perception among the taxpayers that all premiums paid for Life Insurance is eligible for deduction under Section 80C subject to overall limit of Rs.1.50 Lacs. Further, it is also a misconception that all sums received from the insurance company against your life insurance policy is exempted under section 10(10D). You may be in for a shock if you are not careful with the sum assured and the premium you have been paying for these policies...Read on...
Recently, one of my old life insurance policies with LIC, which my dad had subscribed for me when i was young, got matured and i received the final amount with bonus in my bank account. While it always feels exciting to receive such amounts in your bank account, it was important for me to understand the tax implications for the same as well.
There is a general perception among the taxpayers that all premiums paid for Life Insurance is eligible for deduction under Section 80C subject to overall limit of INR 1.50 Lacs. Further, it is also a misconception that all sums received from the insurance company against your life insurance policy is exempted under section 10(10D).
The main reason behind such misconceptions is that on every Insurance policy or premium receipt , there is a disclaimer printed that Life insurance premium is eligible for deduction under section 80C and Maturity is tax free Under Section 10(10D). This is also widely publicized by various insurance companies to attract tax savers into buying life insurance.
Neither of the above statements is 100% correct.
When the income tax authorities question you and ask you to justify your tax vs your income, you cannot defend yourself citing ignorance of law. Therefore, it is vital to understand the tax implications in such cases.
Both, Section 80C deduction as well as Sec 10(10D) exemption is available subject to some conditions. Let us discuss these conditions in a bit more detail.
Section 80C (during premium payments) and Section 10(10D) (during policy maturity) tax exemptions DO NOT APPLY to the following amounts received during a specific financial year:
a) Any sum received under a life insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% per cent of the actual capital sum assured. Let us say that the sum assured of your policy is Rs. 10 Lacs. If you are paying a premium of more than Rs. 2 Lacs in any financial year of the policy, then you are not eligible for Sec 80C deductions for that premium or Sec 10D exemption for the payments recd from the insurance company on maturity or as bonus or otherwise.
or
b) on benefits you receive under life insurance policies issued on or after 1st April, 2012, shall be available only if the premium payable in any of the years is not more than 10% of the Sum Insured. The laws are even more stringent for new policies issued after 1st April 2012. The 20% premium limit is now brought down to 10%. One of the reasons for the same has been that there has been lot of top up premiums being paid by the investors to evade taxes.
or
c) sum received under Section 80DD(3),
or
d) any sum received under a Keyman Insurance Policy.
Special Scenario 1 : ULIP (Unit Linked Insurance Plans)
If you chose to discontinue a Unit Linked Insurance Plan before paying for 5 years from commencement of policy, you are not entitled to any tax benefits in the previous year in which the taxpayer terminates the plan .The quantum of deduction already taken in the preceding years would be deemed as the income of the taxpayer in the year in which policy is terminated.
Special Scenario 2 : SPLI (Single Premium Life Insurance)
(Suggested by our Reader : Mr. Bikash Naik)
Even in case of SPLI (Single Premium Life Insurance) policies, if the premium paid in any financial year is more than 20% of the minimum sum assured under the policy, the entire maturity amount becomes taxable as per your current tax bracket.
In fact, the insurer is supposed to deduct 1% TDS (Tax Deduction at Source) (as per Section 194DA) in such cases before remitting the maturity amount to you.
Also, if a single premium policy is surrendered within two years, the deduction allowed in the past under Section 80C will be considered as income of the taxpayer in the year in which insurance policy is surrendered.
Special Scenario 3 : Event of Death
However, the death benefit under your plan is always tax-free under sec 10(10D), which essentially means that in case of any tragic event, your nominee will receive the death benefit amount absolutely tax free - irrespective of the premium % rules as specified above.
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There is a general perception among the taxpayers that all premiums paid for Life Insurance is eligible for deduction under Section 80C subject to overall limit of Rs.1.50 Lacs. Further, it is also a misconception that all sums received from the insurance company against your life insurance policy is exempted under section 10(10D). You may be in for a shock if you are not careful with the sum assured and the premium you have been paying for these policies...Read on...
Recently, one of my old life insurance policies with LIC, which my dad had subscribed for me when i was young, got matured and i received the final amount with bonus in my bank account. While it always feels exciting to receive such amounts in your bank account, it was important for me to understand the tax implications for the same as well.
There is a general perception among the taxpayers that all premiums paid for Life Insurance is eligible for deduction under Section 80C subject to overall limit of INR 1.50 Lacs. Further, it is also a misconception that all sums received from the insurance company against your life insurance policy is exempted under section 10(10D).
The main reason behind such misconceptions is that on every Insurance policy or premium receipt , there is a disclaimer printed that Life insurance premium is eligible for deduction under section 80C and Maturity is tax free Under Section 10(10D). This is also widely publicized by various insurance companies to attract tax savers into buying life insurance.
Neither of the above statements is 100% correct.
When the income tax authorities question you and ask you to justify your tax vs your income, you cannot defend yourself citing ignorance of law. Therefore, it is vital to understand the tax implications in such cases.
Both, Section 80C deduction as well as Sec 10(10D) exemption is available subject to some conditions. Let us discuss these conditions in a bit more detail.
Section 80C (during premium payments) and Section 10(10D) (during policy maturity) tax exemptions DO NOT APPLY to the following amounts received during a specific financial year:
a) Any sum received under a life insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% per cent of the actual capital sum assured. Let us say that the sum assured of your policy is Rs. 10 Lacs. If you are paying a premium of more than Rs. 2 Lacs in any financial year of the policy, then you are not eligible for Sec 80C deductions for that premium or Sec 10D exemption for the payments recd from the insurance company on maturity or as bonus or otherwise.
or
b) on benefits you receive under life insurance policies issued on or after 1st April, 2012, shall be available only if the premium payable in any of the years is not more than 10% of the Sum Insured. The laws are even more stringent for new policies issued after 1st April 2012. The 20% premium limit is now brought down to 10%. One of the reasons for the same has been that there has been lot of top up premiums being paid by the investors to evade taxes.
or
c) sum received under Section 80DD(3),
or
d) any sum received under a Keyman Insurance Policy.
Special Scenario 1 : ULIP (Unit Linked Insurance Plans)
If you chose to discontinue a Unit Linked Insurance Plan before paying for 5 years from commencement of policy, you are not entitled to any tax benefits in the previous year in which the taxpayer terminates the plan .The quantum of deduction already taken in the preceding years would be deemed as the income of the taxpayer in the year in which policy is terminated.
Special Scenario 2 : SPLI (Single Premium Life Insurance)
(Suggested by our Reader : Mr. Bikash Naik)
Even in case of SPLI (Single Premium Life Insurance) policies, if the premium paid in any financial year is more than 20% of the minimum sum assured under the policy, the entire maturity amount becomes taxable as per your current tax bracket.
In fact, the insurer is supposed to deduct 1% TDS (Tax Deduction at Source) (as per Section 194DA) in such cases before remitting the maturity amount to you.
Also, if a single premium policy is surrendered within two years, the deduction allowed in the past under Section 80C will be considered as income of the taxpayer in the year in which insurance policy is surrendered.
Special Scenario 3 : Event of Death
However, the death benefit under your plan is always tax-free under sec 10(10D), which essentially means that in case of any tragic event, your nominee will receive the death benefit amount absolutely tax free - irrespective of the premium % rules as specified above.
Summary
So,
be aware of the laws and be careful of the amount of premium that you
pay every year compared to the sum assured if you want to avail the income tax benefits under Section 80C and Section 10D.Like the article?
Do not hesitate to share. It can make a positive impact on someone's life.
The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.
Under Section 80C life insurance is the long term investment plans which will helpful to gain a financial goal. Save Tax Under Section 80 C of Income Tax, by investing upto Rs 100,000 in any of the 5 options:
ReplyDelete1. Home Loan
2. Investment in Provident Fund
3. Insurance
4. Payment towards Education Fee of Children
5. Interest on National Saving Certificates
I saw this blog entry and I am definitely amazed by the way you create your posts! How exactly do you inform your readers that you have added a new entry to this blog?
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