Income tax benefit on life insurance: section 80C and 10D

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Life insurance is one of the primary and essential requirements of ensuring a financially balanced and comfortable life for your loved ones. The capital benefits that come with life insurance help your family build a safe and safeguarded future, even in your absence. Moreover, under Section 80C and 10D of the Income Tax Act, there are income tax benefits on life insurance. Under section 80C, premiums that you pay towards a life insurance policy qualify for a deduction up to ₹1.5 lakh, while Section 10(10D) makes income on maturity tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.

But if the sum assured is less than 10 times the premium—for instance you pay Rs.1 lakh as premium for a sum assured of Rs.5 lakh—you will get a deduction on the premium up to 10% of the sum assured. In the example, your deduction will be Rs.50,000 and not Rs.1 lakh.

Also, in case of death, the sum assured that’s paid to the nominee continues to be tax-free. But, on maturity, since the policy doesn’t meet the qualifying criterion for income tax benefit, the income will be taxed at the marginal tax rate.

As per Section 80C, the premium paid towards life insurance policies up to the maximum limit of Rs.1,50,000 is eligible for tax deduction and deductions are applicable if the amount of premium paid in a financial year is 20% of the sum assured amount of the policy. This is related only to the life insurance policies that have been issued before 31st March 2012.

For policies which were issued after 1st April 2012, the tax deductions are applicable of the amount of premium paid in a financial year is 10% of the sum assured.

Under section 80C(5) if the insurance policy holder voluntarily surrenders his policy or in case the policy is terminated before 2 years from the date of commencement of policy, then the insured will not receive any benefits on the premium paid, offered under section 80C of Income Tax Act.

Under Section 10(10D) of Income Tax Act, 196, the sum assured amount plus bonus (if any) paid on surrender or maturity of the policy or in case of death of the insured in entirely tax-free for the receiver. Some of the important points of section 10(10D) of tax deductions are:

Any amount payable to the insured under life insurance policies is applicable for tax deduction. The amount payable can maturity benefits and death benefits, allocated sum by way of bonus, surrender value and the survival benefit. Section 10(10D) deduction is also applicable to gains and proceeds from a ULIP and the benefit on maturity proceeds is offered when the premium paid towards the policy is not more than 10% of the sum assured amount.

Any maturity amount of life insurance policy or bonus amount received by the beneficiary of the policy in case of demise of the insured is totally exempted from tax deduction.

In fact, in order to ensure compliance, if the maturity proceeds exceed Rs.1 lakh, then a tax deduction at source (TDS) will apply and the insurer will deduct 1% as TDS (Tax Deducted at Source) if the PAN of the policyholder is available.

HDFC Life offers insurance plans for assured financial security and safe future of your family members. For details, click on the mentioned link: https://www.hdfclife.com/insurance-plans

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