Most investors today use life insurance products as a tool for saving income tax. The investor or the policyholder enjoys income tax benefits on the premiums paid as well as on the maturity proceeds under a life insurance plan.
Here, we will discuss in detail how one can save taxes with the life insurance products under the current income tax laws and rules of our country.
Contrary to what most people think, the entire premium under a life insurance policy is not eligible for tax deductions. If you your policy was purchased before 31st March 2012, you will enjoy tax deductions on your premiums up to an amount, which is 20% of the sum assured. The regulations were later modified and from 1st April 2012, the percentage was reduced to 10% from 20% of the sum assured. However, an additional relaxation of 5% is allowed for an individual suffering from illnesses (specified under section 80DDB) or disabilities (specified under 80U). For instance, your policy guarantees a sum assured of Rs.8,00,000/- for a premium of Rs. 1lakh p.a. Only 10% of the sum assured, i.e. RS. 80,000/- of your premium amount will be absolutely non-taxable. For the balance premium, no additional tax benefits are offered unless you are severely disabled of suffering from a critical illness.
Section 80C and 10(10 D) of Income Tax Act of India
Sections 80C and 10(10 D) of The Income Tax Act 1961 guarantees, tax benefits on the premium you pay and on the maturity benefits you receive. Any amount that your insurer pays as the maturity or the surrender benefit along with bonuses (if any) or even the death benefit payable to your beneficiary is absolutely non-taxable under section 10(10D) of the Income Tax Act. Similarly, under section 80C of the Income Tax Act, up to Rs. 1.5lakh of the premium you pay to your insurer is eligible for Tax deductions. These two sections explain the basic criteria for availing Tax Benefits on your life insurance premiums as well as on your maturity proceeds.
Who can claim the Tax Benefit under Section 80C?
The tax benefits under the Section 80C of the Income Tax Act of 1961 can only be availed if the insurance policy is bought for themselves, husband/wife or children. Many people do not know the number of kids for whom the life insurance policy can be bought or taken. However, an individual can buy any number of life insurance policies for his/her children who can be of the following category – major, minor, unmarried, married or even adopted. A child insurance policy can be taken in the name of any person who will is eligible for any tax benefits whatsoever. Another case to avail the tax benefits is that the life insurance policy can be bought by an individual in the name of his family members under the HUF (Hindu Undivided Family) rule.
What is the Maximum Tax Benefit That Can Be Claimed under Section 80C?
Under the Section 80C of Income Tax Act, 1961, an individual can enjoy tax deductions up to Rs.1,50,000/- of the premium paid under a life insurance plan. That is to say, if an individual has invested around Rs 3,50,000 as his yearly premium in a life insurance policy, only Rs 1.5 lakhs among the total amount will be eligible for Tax Deductions Under 80C of the income tax Act.
Tax Benefits in Case of Early Surrender of termination of the Policy
Under ULIPs, there is a minimum lock-In period of 5 years. But in most cases, soon after the lock-in period is over, investors want to surrender their policy. When an individual buys a policy, he/she needs to hold the policy and pay its premiums on a regular basis for 5 years, which is specified in the Section 80C in order to retain the tax benefits that have been claimed. As per the section 80C (5) of the Income Tax Act, 1961, if the individual who holds the policy surrenders his/her policy voluntarily or in the case his/her policy is terminated by the insurance company for failure to pay premiums (dues) before a predetermined time limit, then the benefits under section 80C on premiums paid for the said policy would not be available to the policyholder. This translates that zero deduction will be permitted to him/her for the premiums paid for the same year in which the policy is terminated/surrendered along with the deductions which have been claimed in the early years for premiums paid (if any) will also be considered as his/her income in the FY in which his/her policy is terminated/surrendered (as described above) & taxed accordingly.
In order to retain the tax benefits of the premium paid, the minimum time periods for the policy to be held by the policyholder are as follows:
- 2 years from the date of commencement of policy for a single premium life insurance policy.
- At least, 5 years for which premiums have been paid from the start of the policy in case of ULIPs.
- At least, 2 years for which premiums have been paid from the start of policy in case of any other life insurance policies.
It is true that life insurance is one of the best ways to tax saving investments. But, buying a life insurance plan only for the sake of saving taxes is what experts do not approve of. That is because, most people, who buy life insurance plans mainly to save taxes often end up buying expensive plans with insufficient life covers. The primary purpose of a life insurance plan is to financially secure the future of your loved ones. Tax benefits are the additional benefits of buying an insurance plan. So, while buying a life insurance plan, what is more important is to check the amount of life insurance cover it guarantees. Every life insurance plan offers tax benefits. Hence, it is important to buy a cost-effective life insurance policy like term plan that offers sufficient life cover for your loved ones, and you will invariably enjoy income tax benefits with it.
In association & sponsored by Policy Bazaar