Tax Benefits on Life Insurance Policy

Purchasing life insurance is a must, especially if your spouse and children are dependent on your income to survive. Even if your spouse is earning, it would be a good idea to cover your life – though this cannot make up for the emotional loss, at least, your family members will be financially secure. There are many life insurance companies in India, offering hundreds of plans for various needs and age groups. While choosing a plan, you also need to consider the tax implications of taking a life cover too.

Deduction under Section 80C:

If you have paid an insurance premium to insure your own life or the life of your spouse or child, such premium payments are eligible for deduction under section 80C of the Income Tax Act. Irrespective of your child being dependent or independent, minor or major, married or unmarried, the deduction under section 80C shall be allowed. An individual and a HUF, both, can claim this deduction under Section 80C.

Many taxpayers have a doubt about whether this deduction is available only in respect of life insurance cover taken with LIC. This is not true. 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.

However, to claim deduction under section 80C the premium paid should not exceed 10% of the sum assured where the policy has been issued after 1st April 2012. For policies issued prior to 1 April 2012, in order to claim this deduction, the premium paid should not exceed 20% of the sum assured. Further, here it is important to note that a policy issued after 1 April 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB, the requirement to claim the deduction under Section 80C is that the premium should not exceed 15% of the sum assured.

“Sum assured” simply means the minimum amount assured under the policy to the survivor. This amount does not include premium which has been agreed to be returned or any payment of bonus on the policy.

Exemption under section 10(10D) on Maturity amount received

When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 1 April 2012 and 20% of sum assured for policies issued before 1 April 2012– any amount received on maturity of a life insurance policy or amount received as a bonus is fully exempt from Income Tax under Section 10(10D). Also covered here are policies taken after 1 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.

No exemption from income tax on the maturity of policies

Taxation, where the premium paid, is more than 10% of the sum assured – Any money received from a life insurance policy, where the premium is more than 10% or 20% of the sum assured as the case may be, is fully taxable.

TDS on life insurance policy

Starting October 2014, if the amount received from a life insurance policy is more than Rs 1,00,000, on policies not covered under an exemption under Section 10(10D), then TDS @ 1% shall be deducted by the insurer before making this payment. TDS will also be deducted on bonus payments. If the amount received is less than Rs 1,00,000, no TDS shall be deducted but the amount received shall be fully taxable for you. You can claim credit for the TDS deducted in your Income Tax Return.

The union budget 2019 has proposed to amend the TDS on insurance policy proceeds to 5% on the amount of income comprised in the proceeds paid or payable upon maturity on or after 1st September 2019.

Tax liability of single premium insurance policies

Taxpayers may not be sure about how payouts from a single-premium insurance policy must be treated. Let us understand the taxability with an example.

Consider that Sandesh had taken a policy from an insurance company with a maturity value of Rs 1,10,000. He paid a single premium of Rs 45,000 on 16 September 2013. 10% of the premium works out to be Rs 11,000. The premium of Rs 45,000 exceeds 10% of the sum assured. Therefore, the insurance maturity proceeds are taxable, and not entitled to exemption under section 10(10D) of the Income Tax Act.

Sandesh surrendered the policy on maturity on 16 September 2019. Since the maturity payment is above Rs 1 lakh, the insurance company is liable to deduct tax on the maturity proceeds. The insurance company is liable to deduct tax at 5% of the income component of the payment, before releasing the payment to the taxpayer. Here, the TDS would be on the net maturity proceeds i.e., on Rs 65,000 (1,10,000-45,000). The TDS would be 5% on Rs 65,000 amounting to Rs 3,250. The net proceeds receivable by Sandesh would be Rs 61,750 (65,000-3,250).

While filing his income tax return, Sandesh should report the net maturity proceeds under ‘income’ from other sources’. Also, Sandesh can claim the credit for TDS of Rs 3,250 against his tax liability determined while filing his return of income.

Source: ClearTax