When I started my career, I never thought about the tax benefit of life insurance. To be honest, I didn’t even know what is ‘tax benefit’! The only thing on my mind then was nothing but living life to the fullest, enjoying every moment, and contributing to family expenses.
But as time passed by, my thoughts towards life insurance plans changed. I came to know about this beautiful financial planning tool called life insurance and the benefits it can add to your financial security. it’s a big reason why I wanted to write this post on the benefits of life insurance.
You see, If I didn’t have life insurance, my wife would be left with an enormous bill when I pass away (and no, I’m not rich). That’s why I want to educate folks about this benefit that too many people overlook – the tax benefits.
Here I’ve listed some of the most prominent tax benefits of life insurance as per the tax slabs in India:
Tax Benefits Under Section 80C
You may be able to claim a deduction for annual premiums paid on a life insurance plan covering your own life or the life of your spouse or child. The policy can cover a dependent or independent child, or an adult child who is married or unmarried.
Any life insurance policy purchased from an IRDAI-approved insurer is eligible for a Section 80C deduction. However, to claim deduction under section 80C, the maximum amount of premium paid cannot exceed 10% of the sum assured in cases where the policy has been issued after 1st April 2012.
In cases where the policy has been issued before 1st April 2012, to be eligible for this deduction, the maximum amount of premium paid cannot exceed 20% of the sum assured.
Tax Saving On Maturity Proceeds Under Section 10(10D)
Tax-free income from a life insurance policy is received when the following conditions are met: Premium does not exceed 10% of the sum assured for policies issued after 1 April 2012 (20% for policies issued before that date).
Amounts received on maturity of policies taken in 2013 or before are tax-free if the premium paid does not exceed Rs. 1,00,000 and the sum assured is less than Rs. 15 lakhs respectively. The premium must be paid by one or more persons in India who are related to each other.
What About The TDS On Life Insurance Policies?
On policies not covered under an exemption under Section 10(10D), if a life insurance payout exceeds Rs 1 lakh, then TDS of 1% will be withheld by the insurer before making this payment. TDS will also be withheld on bonus payments.
If the payout is less than Rs 1 lakh, no TDS will be deducted but the payout will be fully taxable for you. You can avail of this benefit on maturity provided that you have paid the tax deducted at source (TDS). The budget of 2019 proposes to increase TDS on proceeds of insurance policies to 5%.
Tax Benefits On Single-Premium Insurance Premiums
The taxability of a single-premium policy is not clear to all taxpayers. Here’s how it works, using an example: Suppose you purchased a life insurance plan with a maturity value of Rs 1,10,000. You paid a single premium of Rs 45,000 and 10% of this amount works out to be Rs 11,000.
The premium is Rs 45,000, which is the same as 10% of the sum assured. Therefore, the maturity proceeds are taxable for a tax deduction and not entitled to exemption under section 10(10D) of the Income Tax Act.
However, since the maturity payment exceeds Rs 1 lakh, the insurance company is liable to deduct tax on the maturity proceeds at the highest basic rate plus surcharge and cess. The insurance company is liable to deduct tax at 5% of the income component of the payment, before releasing the payment to you.
Here, the tax would be on the net maturity proceeds (money you get when your investment matures). The TDS would be 5% on Rs 65,000 (Rs 1,10,000 minus Rs 45,000) = Rs 3,250. You should receive Rs 61,750 (Rs 65,000 minus Rs 3,250) as your net proceeds.
Questions That I Get Asked Almost Daily Related to Life Insurance Tax Savings
1. Where Should I Invest To Save Tax?
You can save tax by investing in a ULIP. The premiums you pay towards the plan are deducted from your taxable income when you file for a return, lowering it and thus saving taxes for you.
2. How Do I Approach Tax Saving Planning?
If you make premium payments on an insurance policy, a retirement account, or some other type of investment, you can save tax under Section 80C. You can also invest in a range of other financial instruments, including fixed deposits and systematic investment plans.
3. How Much Amount Should I Invest For Tax Saving?
If you are looking to save taxes by investing in certain financial products, you can invest up to ₹ 1.5 lakh per year under Section 80C of the Income Tax Act. This investment can allow you to save up to ₹ 46,800^^ taxes per year.
4. Can I Purchase Multiple Tax Saving Plans?
If you plan to invest in tax-exempt bonds, there is no limit to how much you can buy. You can deduct your expenses up to the limits specified in various sections of the Income Tax Act. Each section has a different limit on deductions.
Life insurance is one of those things that we all need but never think about. Until something forces us to. Thankfully, the tax benefits that come with the purchase of a life insurance plan make this type of insurance a smart choice for most people.
But there are still a few people out there who don’t seem to realize what they’re missing out on when they opt not to get life insurance. Hopefully, this post will help some people see the light on this essential form of protection.