Purchasing life insurance is the best way to stay prepared for the different uncertainties of life. Despite the various benefits provided by the life insurance plans, life insurance penetration in the country is quite low. The Government has been encouraging the common people to purchase life insurance products by offering several additional benefits like tax benefits to make it more beneficial for the policyholders.
One important benefit offered by life insurance policies is that they act as a tool for obtaining tax deductions. Let us discuss these in detail:
Tax Benefits Under Life Insurance Policies
You are eligible to claim tax deductions on the premium paid for your life insurance policy. Under Section 80C, Section 80 D, and Section 10(10D) of the Income Tax Act, 1961 you can claim tax deductions on the premium paid and on the payouts of your life insurance policy.
a. Tax Deduction on the Premium Paid Under Section 80C
Under Section 80C, the premium paid for your life insurance policy is allowed to be deducted from your taxable income. You can claim a tax deduction of up to INR 1.5 lakh. The major conditions which must be fulfilled to claim the tax deduction under Section 80C are
- If your life insurance policy had been issued before 1st April 2012, a tax deduction would be allowed on the premium which is up to 20% of the sum assured. If the premium of your insurance plan is more than 20% of the Sum assured, then the additional amount paid as premium would not be allowed as a tax deduction. It would become a part of your taxable income and would be taxed as per the normal Income Tax slab rates. For example, suppose the sum assured of your policy is INR 15 lakh, then your premium must be up to INR 3 lakh for being eligible for deduction. In case of the premium being higher than INR 3 lakh, the excess premium would be taxable.
- If the life insurance policy has been issued on or after 1st April 2012, a tax deduction would be allowed on the premium which is up to 10% of the sum assured. If the premium of the insurance plan is more than 10% of the Sum assured, then the additional amount paid as premium would be not allowed as a tax deduction. It would be a part of your taxable income and would be taxed according to the General Income Tax slab rates. Suppose, your life insurance policy has a sum assured of INR 15 lakh, then the premium must be up to INR 1.5 lakh to be eligible for deduction. If the premium is higher than INR 1.5 lakh, the excess premium would be taxable.
- If you are suffering from a disability which has been defined under Section 80U or suffering from a specific ailment which has been defined under Section 80DDB and the life insurance policy’s issue date is on or after 1st April 2013 then the deduction allowed on the premium would be up to 15% of the sum assured. If the premium is more than 15% of the sum assured, then the additional premium paid is not permissible for a deduction. It would become a part of your taxable income and would be taxable as per the Income Tax slab rates.
b. Tax Benefit on the Life Insurance Rider Premium Under Section 80D
Life insurance policies would offer riders along with the base insurance plan for enhanced coverage. Some of the most commonly available riders along with life insurance policies are
- Critical illness rider
- Surgical benefit rider
- Accidental death benefit rider
- Terminal illness rider
Points to Note
- When you are selecting the riders which help in providing health insurance cover like the surgical benefit rider, critical illness rider, etc. then the premium paid for these riders can be used to claim a deduction under the Section 80D.
- These riders can be purchased along with the policy taken for yourself, your spouse or for your dependent children.
- The maximum limit for deduction under Section 80D is INR 25,000. However, it can become INR 50,000 if you or the person who is insured is a senior citizen.
c. Tax Benefit on the Benefits Received Under Section 10(10D)
Under Section 10(10D) of the Income Tax Act, 1961 life insurance payouts which are received as a death benefit or as survival benefit on maturity including the bonus are tax exempted.
But, payouts under the below-mentioned cases are not tax exempted.
- If a return of premium policy has been taken, then the maturity benefit would be exempted if:
- You have purchased the insurance policy before 1st April 2012 and the premium paid is not more than 20% of the sum insured
- You have purchased the insurance policy on or after 1st April 2012 and the premium paid is not more than 10% of the sum insured
- You are a disabled or ailing individual as specified under Section 80U and Section 80DDB respectively who has purchased the policy on or after 1st April 2013 and the premium paid is not more than 15% of the sum assured.
- Benefits received under Section 80 DD (3) would not be qualifying for a tax exemption.
- Any amount which has been received as a payout amount under the Keyman Insurance policy is not tax exempted.
TDS on Life Insurance Policies
It is very common thinking that there is no income tax levied when your life insurance policy has been matured. But actually, TDS is deducted on the maturity of claims. However, there is a large confusion as to where TDS fits in between the life insurance premium paid and the benefits obtained.
What is TDS?
TDS is Tax deducted at Source and in this case, it is a tax which is deducted from your earnings from the life insurance policies before they are paid to you. The deducted tax is then deposited with the Income Tax Department on your behalf in advance. In case of your liable tax being lower than the TDS that has been deposited, you can claim a refund of tax on the TDS that has been deposited.
How TDS is Applicable to Life Insurance Policies?
- On the maturity or death benefit - Under Section 10(10D) of the Income Tax Act, 1961 the benefits that are received from your life insurance policy are exempted from taxes. However, there are some qualifying conditions present under this section. TDS will not be deducted if your life insurance policy qualifies on the prescribed criteria whereas TDS would be deducted if the policy does not qualify the conditions.
- For those life insurance policies which have been issued before 31st March 2012, if the sum assured of your life insurance policy is at least 5 times the annual premium of the policies then TDS would not be applicable.
- For life insurance policies that have been issued on or after 1st April 2012, the sum assured amount must be 10 times that of the annual premium.
If these prescribed conditions are not fulfilled, then TDS would be deducted on your life insurance policy’s maturity amount.
Deduction of TDS
- According to Section 194DA, TDS would be deducted at 1% on your policy's maturity amount if your PAN details are available
- In case of non-availability of PAN details, TDS would be deducted at the rate of 20%
- TDS is usually deducted if the maturity amount of your policy is INR 1 lakh and above
- For the calculation of the applicable TDS, you should include the maturity amount which is payable into your total income
- However, according to the Union Budget 2019, there has been an amendment in the TDS on the insurance policy proceeds. After 1st September 2019, the TDS on insurance policy proceeds is being deducted at 5% on your policy’s maturity amount
- For NRIs, TDS can be deducted under Section 195 if the prescribed conditions under Section 10(10D) are not fulfilled
- For those NRIs who are residing in the countries having the benefits of DTAA (Double Tax Avoidance Agreement), the TDS would not be deducted.
So, you must be careful while purchasing your life insurance policy. You must be aware of the rules related to tax deductions and understand the deduction brackets clearly to avoid TDS deductions on your maturity amount.