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Life Insurance Tax Benefits in India

Life insurance policies in India serve a dual purpose: providing financial security and offering significant tax benefits. Under the Income Tax Act 1961, policyholders can take advantage of various tax-saving opportunities. Tax deductions on premiums paid can be availed under the 80C deduction, with a maximum annual limit of ₹1.5 lakhs. Additionally, policy proceeds are tax-exempt under Section 10(10D), offering significant financial benefits. ...Read More

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Term Insurance

What are the Life Insurance Tax Benefits?

Life Insurance Tax Benefits in India
July 11, 2024

Table of Content

 

You might know you can save tax by investing in life insurance policies. But what is life insurance? 

Life insurance is a vital element of financial planning, and it offers death and maturity benefits to the nominee or the policyholders. In the case of untimely death, life insurance offers financial support to the policyholder's family members.

What are the Life Insurance Tax Benefits?

Life insurance policies in India allow individuals or policyholders to save taxes by investing in life insurance policies under the Income Tax Act 1961.

These tax benefits allow individuals to save taxes along with getting financial security for themselves. These benefits can be categorised into deductions and exemptions. While both help you reduce your tax liability, they have their own applicability.

Tax deductions:
The Income Tax Act allows policyholders to save tax by reducing expenses/investments from their Gross Total Income. The life or term plan premiums paid are eligible for tax deductions under section 80C. A maximum of 1.5 lakhs can be saved each year as per the Income Tax Act, 1961. These benefits include premiums paid for policy bought for a spouse or children.

Tax exemptions:
This is a part of your income that is not subject to tax and can be excluded from your total income. Tax exemptions are applicable to payouts or proceeds from the policy. They fall under section 10 (10D) of the Income Tax Act.

We shall learn about these in detail in a later section.

How To Save Income Tax With Life Insurance Policies?

You can save income tax by buying a life insurance policy at various stages of the plan. Let’s discuss the same.

  • Phase 1: Entry Advantage

    • In this stage, you are eligible for tax deductions under sections 80C, 80CCC and 80D of the Income Tax Act. Section 80C is for life insurance, 80CCC is for pension plans, and 80D is for health insurance.

  • Phase 2: Earnings Advantage

    • Your investment in the life insurance policy will grow over time and is tax-free(subject to conditions).

  • Phase 3: Exclusive Switching Advantage

    • Let's say you want to make a switch between different investments. These switches can be across equity, debt or other funds and are not currently taxable.

  • Phase 4: Exit Advantage

    The payouts or proceeds from the policy are eligible for tax exemptions u/s 10(10D) of the Income Tax Act 1961. However, there are certain terms and conditions you must know and follow.

Life Insurance Tax Benefits Under Different Sections of the Income Tax Act (ITA), 1961?

Now, let’s discuss the different sections of the Income Tax Act, 1961.

  • Section 80C

    • Section 80C allows policyholders to reduce their tax liability by paying premiums towards the life insurance policy for which a maximum deduction can be claimed up to Rs.1.5 lakhs a year.

  • Section 80D

    • This section allows individuals to save taxes on making premium payments towards health insurance plans. This is also applicable to policies taken for spouses, children and/or parents. The maximum tax benefit is up to Rs 25,000 a year. It can rise to Rs 1,00,000 if the insured and his parents is above 60 years of age. Also, Rs 5000 worth of tax deduction can be claimed for yearly preventive healthcare such as health checkups subject to above threshold limit.

  • Section 10(10D)

    • The section exempts you from paying taxes on the proceeds or payouts upon the maturity of the policy. It is usually applicable to all proceeds from life insurance policies, be it from death or maturity benefits, provided the policy satisfies the conditions laid down in the section.

  • Section 80CCC

    • This section allows policyholders to be eligible for tax deductions upon payment of policy premiums towards specified retirement or pension plans. The maximum deduction is available for Rs 1.5 lakhs a year. In case the policyholders surrenders the pension plan, the amount received on surrender shall be taxable as his income, if the deduction was claimed under this section.

  • Section 10(10A)

    • As per this section, a commuted pension (which is received in a lump sum) is fully exempted from tax for government employees or from pension funds of life insurance companies. Uncommuted or monthly pensions are fully taxable and are not exempted from tax.

  • Section 80CCE

    • This section limits the maximum deduction under sections 80C, 80CCC, and section 80CCD(1) to Rs 1.5 lakhs per financial year.

What are the Tax Benefits on Riders of Life Insurance?

Riders are add-ons to a policy that are chosen to enhance the coverage of any policy. But more offering enhanced protection, they also come with tax benefits.

A few benefits are mentioned below:

  • Section 80D allows you to get a tax deduction on health insurance premium paid if you opt for a critical illness rider with your health insurance plans. The maximum deduction can be up to Rs 25,000 per year. It can rise to Rs 1,00,000 per year for senior citizens (taxpayer or his/her parents).
  • If you choose the option of return of a premium rider along with your policy, your premium amount rises. This further allows you to avail more tax benefits under section 80C of the Income Tax Act.

Riders do not only enhance the policy’s coverage but also make you eligible for additional tax benefits. Hence, it offers the dual benefits of increased protection and tax savings. For exact information, you must read your policy document and carefully review the terms and conditions.

What is TDS on Life Insurance Policy?

The TDS to be levied on a life insurance policy is as follows:

1. From October 2014, it has been declared that in case of the payouts above Rs 1 lakh from a life insurance plan, that isn’t exempted from tax under section 10(10D), the insurance company is bound to deduct 1% TDS while making payments or transferring proceeds including any bonuses.

2. If the proceeds you receive do not exceed Rs 1 lakh, the TDS won’t be deducted. However, the income received shall be fully taxable. The TDS claim can be availed of while filing income tax returns.

3. On any life insurance policy payout paid on or after 1st October 2019, TDS deducted shall be 5% of the net proceeds (payouts less premiums paid) or income from the policy as stated in the Union Budget of 2019.

4. There are also some exemptions to the TDS deduction under the section 194DA. Some of these are as follows:

  • If any amount is received under sections 80DD(3) or 80DDA(3)
  • The policy was bought between 1st April 2003 - 31st March 2012. Premium paid against life insurance does not exceed 20% of the total sum assured.
  • The policy was bought after 1st April 2012, and the premium amount paid to the insurance company doesn't exceed 10% of the sum assured.
  • In other words, no TDS is deducted if the life insurance policy falls under the purview of Section 10(10D).
  • TDS deduction is attracted only in case of life insurance policy payouts & hence pension, annuity & other types of payouts are outside its scope.

What is GST on Life Insurance Policy?

Before the introduction of GST, policyholders had to pay a 15% service tax that included the Basic Service Tax, Swachh Bharat Cess, and Krishi Kalyan Cess.

After implementing GST, a uniform GST rate of 18% on the term insurance premium is charged. In case of rest of the products, insurance company is given an option to charge GST at the rates mentioned in GST Law.

Eligibility Criteria to Claim Life Insurance Tax Benefits

Deductions and exemptions to save taxes legally can be opted by HUFs (Hindu Undivided Families) and individuals. These can be claimed on the premium amounts paid and on the receipt of maturity proceeds or any other income from the policy. These deductions and expenses help to reduce the overall tax liability of policyholders.

These benefits can be availed of for:

1. Self

2. Spouse

3. Parents

4. Children

Conclusion

The main idea behind this guide was to inform you of the tax benefits available for buying a life insurance policy for yourself and your loved ones.

However, you must note that you shouldn’t buy a certain policy just because it offers lucrative tax savings options. You must be clear with your goals, affordability, personal aspects, income, etc., before making a purchase.

It is advised to compare different policies, go through the terms and conditions, and ask as many questions as possible before making a decision.

FAQs On Life Insurance Tax Benefits

What are the tax benefits of life insurance?

The premiums for the policy are eligible for tax deduction from the total taxable income of the insured. The maximum income tax deduction that can be availed of is Rs 1.5 lakhs a year under Section 80C.

Will I get life insurance tax benefits when it matures?

It will depend. If the premium that you paid for a life insurance policy is less than 10% of the total sum assured and the policy was issued after 1st April 2012, then the amount received on maturity/ surrender or death is completely tax-exempt under Section 10(10D) of the Income Tax Act.

Moreover, for life insurance policies issued before 1st April 2012, if the premium that was paid does not exceed 20% of the total sum assured, then any amount received is completely tax-exempt.

How much should I invest to save tax on ULIP plans?

You can invest up to Rs 1.5 lakhs towards the ULIP premium payment a year to avail yourself of tax benefits under section 80C of the Income Tax Act.

Is ULIP a good tax-saving investment?

ULIP is an attractive investment because it allows you to save taxes in two ways. First, the premium payments are eligible for tax deduction u/s 80 C of the Income Tax Act, and then, proceeds or payouts are eligible for tax exemption under section 10(10D) if the policy satisfies the conditions laid down in Section 10(10D)

How do you see how effective your tax-free instruments are?

To evaluate how effective a tax-free instrument is, you must focus on its Liquidity, Safety, ROI (Return on Investment), Convertibility, Accessibility, Costs, etc., along with tax savings.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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1. Provided all due premiums have been paid and the policy is in force.

15. Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime.

Note - Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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