Life insurance policies are not just a way to ensure that your life is insured in case of death, disability, job loss or accidents. The government’s encouragement of life insurance policies is shown through their inclusion in the deductions that can be availed under Sections 10(10D) and 80C of the Income Tax Act. So even as you secure the financial needs of yourself and your family, you can take advantage of the provisions of the Income Tax Act to claim exemptions on how much income tax you need to pay.
Section 80C and Life Insurance Premiums:
Premiums paid towards a Life Insurance Policy can be deducted from your income when considering income tax, under Section 80C of the Income Tax Act.
- For Individuals: An individual can claim deduction for life insurance premiums paid towards policies that have been taken for self, spouse or own child – who may be dependent, independent, married or unmarried. You cannot claim deductions on premiums paid towards life insurance policies taken for parents, siblings or in-laws.
- For HUF: Hindu Undivided Families (HUF) can claim deductions for life insurance premiums paid towards any member of the HUF.
Things To Remember:
The maximum deduction that can be claimed for a life insurance premium is 10% of the sum assured. If the person for whom the policy is taken (after April 1, 2013) suffers from total or severe disability as per Section 80U or suffers from a disease mentioned in Section 80DDB, then you can claim up to 15% of the sum assured as premium-paid deduction. If the policy was issued before March 31, 2012, you can claim up to 20% of the sum assured.
If the insurance policy is terminated or cancelled within two years of start of the policy due to failure to pay premium, then you will not be allowed to claim any deduction for the premium amount, and the deductions claimed for that policy in the previous years will be declared null and void. You will have to pay tax on the deductions claimed in the previous 2 years, during the ongoing assessment year.
You can only claim up to Rs. 1.5 lakh cumulatively as deduction under Sections 80C, 80CCC and 80CCD taken together.
Section 10(10D) and Life Insurance Payout:
Section 10(10D) allows you to claim tax exemption on the amount you receive as life insurance payout – including the sum assured and bonus – at the time of maturity, surrender or death of the person whose life was insured. However, there are certain conditions on this exemption:
- If a life insurance policy is issued after April 1, 2003 and up to March 31, 2012 and the premium payable in a year is more than 20% of the “Actual Sum Assured”, then the payout received will fall under the ambit of tax in the year in which the insured person receives the proceeds. The actual sum assured means the least amount that you are guaranteed to receive in all the policy years, excluding the bonus and any premiums that could be returned to you.
- For policies issued after April 1, 2012, the above clause applies, but with a change in the premium payable to 10% of the actual sum assured. And in case the person whose life is insured is completely or severely disabled or is ailing with specified diseases, then the applicable limit is 15%.
- If the person whose life was insured died and their legal nominees are receiving the proceeds, then the above clauses are not applicable. The entire amount is free from tax for the nominees.
- If you were part of a Keyman insurance policy, then the proceeds are taxable. A Keyman insurance policy is one where the policy is taken on a person’s life by someone else, for example, by employers. So when the employer is the beneficiary for a life insurance policy taken by them on behalf of the employee, the amount received by the employer on death, disability, resignation or retirement of the employee is taxable.
If the policy proceeds are not exempt from taxation under Section 10(10D), and your PAN is registered with the insurer, then you will have to pay TDS at the rate of 2% of the sum received. But you have to pay tax only if the amount received is more than Rs. 1 lakh. If the PAN is not submitted, then 20% of the amount will be taken as tax.
If you, your spouse or children have a life insurance policy, ensure that you are making the most of these tax deductions and exemptions allowed to you under Sections 10(10D) and 80C. This will help you reduce the total amount of tax payable to the government. However, ensure that both you and your spouse, or your children are not using the same policy for deduction on their tax payments.