Tax Benefits on Life Insurance

Life insurance policies are an extremely useful way of ensuring your family’s financial security after your demise. This is the foremost reason one takes up a life insurance policy but it has other benefits too. Life insurance policies are an extremely effective tax planning tool. They can help you save up a lot on taxes. Tax benefits on life insurance can be availed by policyholders under the Income Tax Act 1961.

There are two types of tax benefits available on life insurance policies, Deductions, and exemptions. Let’s understand them in detail.

Deductions under section 80C of the Indian Income Tax Act

Insurance premiums paid for policies taken for one’s own self, spouse and children are eligible for deduction under the income tax act, section 80C.

1. The deduction on the child’s premium is allowed in every case. Irrespective of the fact the child is dependent or independent, married or unmarried, minor or adult.
2. The premium can be claimed by an individual or a Hindu undivided family, under section 80C.
3. The deduction is allowed only if the amount of premium paid does not exceed more than 10% of the sum insured. This is for the policies issued after 1st April 2012.
4. For policies issued before 1st April 2012, the claim can be put forward for premiums paid for up to 20% of the total amount.
5. For policies issued after 1st April 2013, a tax benefit for up to 15% of the amount is allowed in case if the policyholder suffers from a disability or an illness mentioned under 80(U) and 80DDB.

Exemption of the maturity amount received under section 10(10D) of the income tax act

1. The policies issued after 1st April 2012 that have premiums more than 10% of the sum assured, receive the entire amount on maturity and are exempted from taxes.
2. The entire amount of maturity is also received by policyholders whose policies are issued prior to 1st April 2012 and have premiums more than 20% of the sum assured.
3. The policies issued after 1 April 2013 that are held by individuals that suffer from disability or illness mentioned under section 80(U) and 80DDB, and the premium for which exceeds 15% are also liable to receive full amount on maturity.

Life Insurance policies and TDS (Tax Deducted at Source)

1. For policies that are not covered under any exemptions, and the amount received under these policies is above 1 lakh, the insurer deducts a TDS of 1% before making the payment. This TDS is also deducted from bonus amounts.
2. For an amount less than 1 lakh, there are no TDS deductions made. Although this amount is fully taxable to the receiver.
3. This rule is applicable for policies issued and payments made in and after October 2014.
4. Credits can be claimed for TDS deducted in the income tax returns.

Life insurance companies in India offer various policies. Out of these, you must choose the one that meets your requirements. While choosing a policy, the tax considerations must also be studied and understood clearly as they can make a huge difference in your financial planning and standing.