Learn About Taxability on Your Life Insurance Policy Payouts
It is natural for a person to assume that the insurance gains come with tax benefits. This is based upon certain terms and conditions that need to be understood by you before you can reap the benefits of your life insurance. You need to be more vigilant when we plan on claiming your insurance.
Now you need to understand and scrutinise the benefits that fall under a life insurance policy closely.
Under Section 10 (10D)
According to the provisions of section 10 (10D) of the income tax act, it provides full dispensation of any sum procured through a life insurance policy. These sums also encompass the amounts designated by means of bonuses in these kinds of policies
There are a few aspects under section 10 (10D) of The Income Tax Act against a life insurance policy:
Maturity benefit from a life insurance policy is tax-free under section 10(10D) of the Income Tax Act, 1961 provided the terms and conditions for the same are fulfilled. These comprise gains received after death, gains that can be procured after maturity and accumulated gains. The conditions for availing the 10(10)D benefit are:
- The sum assured needs to be at least 10 times the annualised premium in all the policy years
- The investment needs to be for a minimum of 5 years, prior to which 10(10)D benefit is not applicable.
Exclusions of Section 10 (10D) of The Income Tax Act
- If a life insurance policy is issued after 1.4.2003 but on or before 31.3.2012 and if the premium that is owed by the insured goes beyond 20% per year of the original amount guaranteed then the policy will be taxable by the insured individual. For individuals that have purchased insurance after 1.4.2012, the said 20% has been alternated to 10%.
- Gains attained by means of keyman insurance is taxable.
- Keyman insurance is purchased by an employer for employees that are exclusive to the company. In the case of keyman insurance, the claim gains will be obtained by the employer to cover up the losses that the organisation will undergo after the loss of their skilled employee/ employees.
- Only specific employees that include company directors, main individuals from the sales department, essential employees with specific skills and essential project managers are qualified for Keyman insurance.
There are other tax benefits available to life insurance policies. They are:
- Under Section 80C
The premium paid towards life insurance plans is tax free under section 80C upto INR 1.5 lakhs a year subject to certain terms and conditions. - Under Section 80D
The premium paid towards health benefits in life insurance plans is tax free under section 80D upto INR 25,000 a year for premium paid towards self, spouse and children subject to certain terms and conditions. There is an additional benefit for premium paid towards parents or INR 25,000. If anyone is more than 60 years of age, the limit is enhanced to INR 50,000 a year.
However, there are certain exemptions that can also be availed by certain other sections of the income tax act including section 80C and section 80D. Listing some points below that will provide clarity about the said sections.
Exemptions According to the Section 80C of The Income Tax Act.
Income tax laws that are characterised by The Income Tax Act allow provisions for the insured to keep their burden to the least minimum. According to the section 80C Income tax act of 1961, the insured equips themselves for full immunity from a tax deduction for up to an amount of INR 1.5 lakhs for each financial year. This insurance can be availed by the members of a particular family including partners and offsprings.
Apart from the INR 1.5 lakhs, the insured can demand an exemption of an excess INR 50,000 if the insured makes an endowment or investment in the National Pension Scheme (NPS). This means that an individual can avail a tax benefit of a total amount of INR 2 lakhs.
Many individuals skip the opportunity of gaining an extra immunity as they are unaware of the benefits that they could gain if they were well-versed with the laws related to these aspects.
Exemptions According to the Section 80D of The Income Tax Act
The table for 80D benefit is:
| Premium paid towards Self/Spouse and children | Premium paid towards parents | Total deduction under section 80D | |
|---|---|---|---|
| Self/Spouse and children <60 years + No parents | INR 25,000 | 0 | INR 25,000 |
| Self/Spouse and children <60 years + Parents < 60 years | INR 25,000 | INR 25,000 | INR 50,000 |
| Self/Spouse and children <60 years + Parents >= 60 years | INR 25,000 | INR 50,000 | INR 75,000 |
| Self/Spouse and children >= 60 years + Parents >= 60 years | INR 50,000 | INR 50,000 | INR 1 lakh |
Total benefit receivable under section 80D is INR 1 lakh if both you and your parents are more than 60 years of age.
Conclusion
As aware and alert citizens, we need to make sure that we keep our eyes open and be on the lookout whenever we want to purchase and avail the benefits of a life insurance policy. As explained earlier under section 80C, people generally fail to avail benefits as they are not fully educated about the acquisitions that they could receive just by making themselves aware.