Understanding Tax Benefits of Life Insurance Policy

Rishabh was filing his income tax returns for the first time on his own. He was thus confused about the treatment of his life insurance policies. He had a term insurance plan of Rs 1 crore for which he paid a premium of Rs 12,000 every year. Moreover, he had also invested in a child insurance plan this year when he became a proud daddy as well as an endowment plan for which he paid a premium of Rs 24,000 and Rs 33,000 annually respectively. He also took a health insurance plan for himself, spouse and children for Rs 5 lakhs of coverage and paid a premium of Rs 15,000 annually. Thus, his total premiumoutgo for the year approximated to about Rs.84, 000 and he wasn’t sure about its tax treatment. One of his Unit Linked Policies of Rs 5 lakhs sum assured also matured this year for which he used to pay an annual premium of Rs 50,000. Though the proceeds were not subject to any tax deduction, he didn’t know whether he should include it in his taxable income. Confused, he went to his financial advisor who sorted out his dilemma. Let’s see what his advisor advised.

Besides being an important tool of financial protection and security, life insurance also has tax-related benefits. Thus, it is considered to be an effective long-term tax planning tool as it is entitled to tax benefits under Income Tax Act, 1961. Rishabh’s premiums and also the benefits he received were tax-free. While the premiums acted as deductions from the taxable income, benefits received were exemptions which did not attract tax. Let’s find out how:

Tax Benefits under Life Insurance Policy

1. Deductions for Premium Payment:

• What is Section 80C?
• Under Section 80C of the Income Tax Act, you will be eligible for the deduction, from your taxable income on the premiums paid towards all your Life Insurance policies till a maximum limit of Rs. 1,50,000.
• The benefit of this deduction is available to self, spouse, dependent children and any member of HUF (Hindu Undivided Family).
• While the maximum limit under Section 80C is Rs. 1.5 lakhs, there is also a maximum limit on the premium amount vis-à-vis the Sum Assured. This limit depends on the date of the policy issuance.

• What is Section 80D?
  • Under Section 80D of the Income Tax Act, you will be eligible for the deduction, from your taxable income on the premium paid towards all your Health Insurance policies till a maximum limit of:
    • ₹25,000 for self, spouse and children.
    • An additional amount of ₹25,000 for premium paid towards parents.
  • However, an increased deduction of ₹30,000/- shall be allowed in case any of the person mentioned above is a senior citizen.
  • The above mentioned limits include ₹5,000 for preventive health check-up.

Thus, the total premium paid for Rishabh’s health policies or additional health riders in life insurance policies like personal accident, critical illness, etc. will be exempt from income tax under section 80D till ₹25,000. If he had an additional plan for this parents, he would have got an additional exemption of ₹25,000.

• Section 80DD:

Although Rishabh did not need this deduction but under this section, the premium paid for disabled people who are dependent for their medical treatment is allowed as a deduction. The quantum of deduction for such disability is ₹75,000 every year. An increased deduction of ₹1,25,000 shall be allowed in the case of severe disability.

2. Exemptions for Maturity Benefit:
   

• What is Section 10(10D)?
• Any amount received at maturity or surrender of policy of insured shall be exempt from income tax under section 10(10) D provided the terms and conditions are fulfilled. This includes the sum given in the form of bonus on such policy. However, there are 2 conditions for this tax exemption:
  • The premium should be at max 1/10^th of the sum assured in all the years.
  • The policy is not surrendered within the first 5 years.
• However, the rule does not apply in case of death benefits. Death benefits, irrespective of the premium paid, would be completely tax-free.