Insurance policies act as a cushion for meeting the financial needs of the policy holder or the nominee.
A life insurance cover provides a number of benefits to an individual, including reduction in taxable income.
However, there is usually confusion over the tax benefit aspect of life insurance policies. For instance, it is a common perception that the entire premium amount is deducted from taxable income or the entire maturity amount is exempt from tax.
But that is not the case always. The claim for deductions or exemptions is based on the eligibility criteria and the type of insurance policy taken by the individuals.
Tax benefit for premium
The premium you pay to an insurance company for a life insurance policy can be claimed as a deduction from total taxable income.
This benefit is for policies taken either for self, spouse or children. The maximum amount that can be claimed as deduction remains the same, that is, Rs. 1.5 lakh under Section 80C, as the 2017-18 Budget did not offer any additional respite.
However, note that this benefit is subject to certain conditions.
In case of policies which were bought on or after April 1, 2012, the maximum deduction allowed for premium is 10 per cent of the sum assured; any excess amount paid cannot be claimed as deduction.
For policies issued before March 31, 2012 the ceiling is higher at 20 per cent.
For instance, if you hold an endowment plan which was bought after April 1, 2012 where the sum assured is Rs. 1 lakh and the premium is Rs. 15,000, you can claim tax deduction for only Rs. 10,000.
Another important point to note here is that if you want to retain the benefit you got under Section 80C for the premium you paid on an insurance policy, you should stay put and pay premiums regularly for a minimum number of years.
For instance, if you hold a ULIP, you have to pay premium for at least five years. If you terminate it earlier, the aggregate amount of tax deductions allowed in the previous years would be disallowed and the policy holder will have to pay tax accordingly.
In case of all other insurance policies, the minimum time period the policy should have been in force is two years, says,
Parizad Sirwalla, Partner and Head, Global Mobility Services, KPMG, India.
Tax on maturity
Death benefits paid on a life insurance policy to the nominee are exempt from tax. The amount received upon maturity of an endowment plan or ULIP is also fully exempt from tax under Section 10(10D).
However, maturity proceeds from pension plans (portion of commuted pension) and the proceeds from insurance policies on disabled dependants are taxable as per the individual’s tax slab.
Also, for policies bought after April 1, 2012, if the premium in any year is more than 10 per cent of the sum insured, the maturity amount is taxable.
Similarly, the maturity amount is taxable if the premium in any year is more than 20 per cent of the sum insured for policies bought between April 1, 2003 and March 31, 2012.
If Section 10(10D) is not applicable to your life insurance policies, you are liable to tax deducted at source (TDS) of 1 per cent from the insurance companies.
However, no TDS is deducted if the insurance proceeds received are less than Rs. 1 lakh. Alok Agarwal, Senior Director, Deloitte Haskins & Sells LLP, says: “Insurance companies shall charge TDS if the proceeds are not exempt under 10(10D). But in cases where the proceeds are less than Rs. 1 lakh and are not exempt under the said Section, the individual has to furnish the proceeds as income and pay tax according to the tax slab.”
According to Vineet Patni, Chief Institutional Business Officer, Bajaj Allianz Life Insurance, 20 per cent TDS will be deducted if a policy-holder does not produce PAN at the time of receipt of maturity proceeds.
CAP ON DEDUCTION
In case of policies bought after April 1, 2012, the maximum deduction allowed for premium is 10 per cent of the sum assured
Maximum of Rs. 1.5 lakh is allowed as deduction for premium
Pay premiums regularly to retain deductions
Death claims are exempt from tax