RISK COVER: Tax deduction for life insurance premium is allowed only if it 10% or less of the sum assured; for differently-abled 15% is allowed
This is the time of the year when most salaried employees start planning their tax-saving investments, after several reminders from their human resources departments. And though the purpose of life insurance is to provide risk coverage, the fact remains that it continues to be a preferred option for tax saving. Tax laws allow you certain tax benefits for life insurance premium paid. The laws also allow you tax exemption in respect of the life insurance policy. These benefits are available subject to certain conditions. Let us understand it.
Tax benefits for life insurance premium
Under Section 80 C of Income Tax Act, you can claim deduction for life insurance premium (LIP) paid by you upto Rs 1.50 lakh in a year along with other various items including for Public Provident Fund, Provident Fund, tuition fee, repayment of home loan, NSC, ELSS, etc. The deduction in respect of life insurance premium paid can be claimed only in respect of life insurance policy on the life of self, spouse and children. It is not necessary that the child should be financially dependent on you. You can effectively use it for tax planning and thus reduce the overall tax outgo between parents and earning children. Due to meagre limit of Rs 1.50 lakh of Section 80C which is crowded by many big tickets items like provident fund contribution, home loan repayment, it gets exhausted early and for many of the eligible items you are not able to claim the deduction.
Likewise for senior citizens for whom only limited items are suitable and thus available under Section 80C, are not able to utilise this limit of Rs 1.50 lakh. Therefore, the limit tends to remain unitilised or get invested in low yield products like bank Fixed Deposits. In such a situation the life insurance premium can be paid by senior citizen parents and thus the overall tax benefit can be maximised.
The deduction for premium is restricted to 10% of the sum assured under Section 80 C. In case the sum assured is less than ten times of the premium the deduction can only be claimed for 10% premium and the excess shall not be eligible for deduction.
The law treats differently-abled persons differently for this deduction. For them the eligible amount of premium is higher, that is 15% of the sum assured. This deduction can be claimed for any product of life insurance companies be it a term plan or a traditional plan or a Unit Linked Insurance Plan (Ulip).
However, in case premium payments are discontinued within first two years since inception of the policy, or if the policy is allowed to be lapsed before completion of first two years, the deduction under Section 80 C cannot be claimed for that year. Moreover deductions claimed in the earlier years are reversed and treated as income for the year in which the policy is allowed to be lapsed.
The deduction is also available in respect of riders like personal accident rider opted with the base policy within the limit of 10% or 15%. Please note that you cannot claim any deduction if you buy the personal accident insurance on a stand alone basis.
Tax treatment of maturity proceeds
The death claim received under life insurance policy is fully exempt in the hands of the nominees under Section 10 (10D). Except for death claims, the money received on insurance policy, whether on maturity or otherwise, is tax free only and only if the amount of premium paid on such policy did not exceed 10% of the sum assured in any year of the tenure of the policy in respect of life insurance policies bought after April 1, 2012. The limit for policies bought between April 1, 2003 to March 31, 2012 is 20%. So even if the premium paid for a single year exceeded 10% of the sum assured, the entire maturity proceed becomes fully taxable. Since the Ulip allows you to top-up your policies, be careful while topping it up, so as to ensure that the total premium including the top-up premium does not cross this limit. Otherwise the money on maturity becomes fully taxable in your hand due to such negligence.
In case of life insurance policies bought for differently-abled person or those suffering from severe ailments, the premium limit for exemption under Section 10(10 (d) is higher at 15% with respect to the sum assured from April 1, 2013. Money received under Keymen's Insurance is fully taxable.
If the money being paid to you is taxable, the life insurance company is mandated to deduct tax at source @ 1% of the sum being paid if the amount exceeds Rs 1 lakh.
The writer is a tax and investment expert
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