Life Insurance Premium and Tax Benefits
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Life insurances have become a part and parcel of our daily lives and purchasing or investing in one does not necessarily mean that you will have to keep on paying the premium till the entire term of the plan.
Life insurances come with varied premium paying terms or PPTs such as a regular premium payment term, a single premium payment term and a limited premium payment term. The income tax department of India offers certain discounts or tax exemptions against the payment of such insurance premiums. In this article, we are going to discuss the different tax benefits that can be claimed by individuals against the payment of life insurance premiums.
The following are the different kinds of tax benefits that can be availed by a life insurance holder against the payment of their premiums -
Tax Deduction Against Premium Payment
Section 80C of the Income Tax Act in India allows life insurance policyholders to claim a tax deduction against the payment of their life insurance premiums. Subject to the payment of an annual premium in either monthly, quarterly, half-yearly or annual installments, a life insurance policyholder can claim a tax free income.
You may also like to read:- How to Save Tax Under Section 80C of Income Tax Act?
This benefit is available only when the ceiling of a life insurance policy is INR 1.5 Lakh and the amount of premium paid in a financial year is equal to 20% of the sum assured in the policy. Life insurance policies that have been issued before 31st March have this benefit.
Tax Exemption Against Maturity Proceeds
The maturity proceeds against a life insurance policy are exempted from tax when the minimum sum assured is consistently maintained at 10% of the total annual premiums paid by a policyholder. Unless this condition is fulfilled, the maturity benefit available at then end of the policy’s tenure will be fully taxable on the year of receipt.
Most life insurance policies in India offer a minimum sum assured at 1.25 times the annual premium and a maximum sum assured of 10 times. Investors often choose low coverage plans for lower deduction of mortality charges. While it ensures a higher sum assured at maturity, the proceeds are not tax free. Hence, you must settle for a high coverage option if you want your maturity proceeds at the end of the policy tenure to be tax free.
Tax Exemption Against Policy Surrender
When the premium paid towards a life insurance policy is not more than 10% of the sum assured, then the policyholder can avail a tax benefit under Section 10(10D) of the Income Tax Act. By the provision, any payment received by the policyholder such as maturity benefit, death benefit, no claim bonus, survival benefit and surrender value are deemed to be non taxable.
It is also applicable for gains and returns from unit linked investment policies or ULIPs. Additionally, the sum assured paid to the nominee on the unfortunate occasion of the policyholder’s death from a disability or a disease is deemed to be tax free as well.
Tax Exemption Against Investment
Under this option, premiums paid towards life insurance policies are eligible for a deduction of upto INR 1,50,000. For example, if you make an annual premium payment of INR 2 Lakh for a sum assured amount of INR 20 Lakh, your tax benefit will be restricted to INR 1.5 Lakh of the premium.
But, if your sum assured amount is INR 2.5 Lakh or less than 10 times the premium amount, your tax benefit will be restricted to 10% of the sum assured at INR 25,000. Hence, if you wish to avail a tax benefit against a life insurance investment policy, you should choose the right coverage amount for your long term goals.
Tax Benefit For The Eldest Family Member
Tax benefits can also be availed against the premium paid for the life insurance policy of the eldest member of the family. For premium payments towards policies that cover the parents of the policyholder who are above the age of 60 years, a tax benefit amount of INR 50, 000 can be availed. Hence, under these circumstances, the total tax benefit that they can claim for both of their parents in a year is INR 1 Lakh.
These are the different tax benefits that can be availed against the payment of the life insurance premiums. Purchasing life insurance is important even if your spouse is earning as it guarantees the financial security of your other family members.
Moreover, the tax benefits that you receive are substantial savings and can be utilised by you as per your financial needs and requirements. The pointers mentioned above will hopefully guide you in selecting a life insurance policy that offers just the right kind of tax benefits that you are looking for.
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Also Read:- Tax Benefits Under Term Insurance Plans in 2021
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.
