A Life Insurance Policy is a great investment insurance for anyone to avail. Not only it provides coverage for death, but also for situations like temporary and permanent physical disability resulting in job loss. Life Insurance Policies are also a great financial tool for tax benefits and saving money.
What is a Life Insurance Policy?
Life Insurance is essentially a contract between a policyholder and an insurer i.e. the policy provider. In a life insurance policy, an insurer promises to pay a sum of money and benefits according to the policy to the beneficiary mentioned in the agreement. The money and benefits provided to the beneficiary are in exchange for the premiums which the policyholder pays to the insurance company. The amount and the other benefits can be claimed only upon the death of an insured person or the policyholder. Depending on the contract in the policy, other events such as terminal illness and critical illness can also be covered. The policyholder pays a premium for this, the premium paid is either monthly, quarterly or yearly.
How Can a Life Insurance Policy Help Save Tax?
Taxes are one of the most important things to consider before you go for a life insurance policy. When you go for a life insurance policy you are eligible for some tax deduction under the section 80c, this tax deduction is applicable as long as you pay the premiums for the insurance. Your family may get hold of any payout with the least hassle and the lowest possible tax charge when you die. Hence, one should also look for the tax payable and exemptions when your loved ones get the money from your insurance when you are not there. Payments (money) from the policy are not usually included in inheritance tax purposes.
How Much Tax Can be Saved on a Life Insurance Policy?
Government of India and Department of Income Tax allow tax benefits to encourage more and more people to opt for an insurance policy, which not only provide coverage but also motivates people to invest a part of their savings in a life insurance policy, which will not only create a tax benefit investment but also provide coverage to the survivor family.
Deductions Allowed for Life Insurance Under Section 80C
These are the deductions allowed under the Section 80C:
- Deductions under Section 80C are available only for the individuals and Hindu Undivided Families (HUFs).
- Section 80C, 80CC & 80CCE allows for a maximum exemption of ₹150,000.
- Section 80C allows the deduction for premiums up to 20% of the sum assured, provided the amount of premium paid is in excess of 20% of the actual sum assured, in a particular financial year, for a policy. But this is relevant only to policies that were issued before 31 March 2012.
- For the insurance policies issued on or after the 1st of April, 2012, the deductions are only allowed if the premiums payable don’t exceed 10% of the actual sum assured.
- The benefits claimed will be reversed if the policy has been terminated or annulled within 2 years of the commencement of the policy and it applies to all life insurance policies except ULIPs.
- The benefits of deductions for ULIPs will be reversed if the ULIP has been terminated or annulled within 5 years of the commencement of the ULIP.
Exemptions Allowed for Life Insurance Under Section 10 (10D)
These are the exemptions allowed under the Section 10 (10D) for investments related to life insurance policy:
- The following amounts that a policyholder may receive under a life insurance policy will qualify for the exemption:
- Bonus allocated from the policy
- Survival benefit
- Maturity benefit
- Surrender value
- Death benefit
- The proceeds and gains from a ULIP are also exempted.
- The policy proceeds are taxable for:
- The payouts received on the annuity or pension plans.
- For the group life insurance plans provided by employers.
- For the policies that were bought between 1st of April 2003 and 31st of March 2012: If the premium in any year is more than 20% of the sum insured.
- For the policies bought after 1st April 2012: If the premium in any year is more than 10% of the sum insured.
- For the policies bought after 1st April 2013 for disabled people or those suffering from ailments as under Section 80DDB: If premiums on these policies are more than 15% of the Sum Assured.
However, the conditions mentioned above do not apply to death claims or any amount received on the death of the life insured.
- There is no cap on maximum deduction allowed under Section 10 (10D).
When the deductions allowed under Section 80C are fully utilized one can enjoy a deduction of ₹150,000 which help in bringing down the taxable income by a significant amount.