Income tax laws in India allow you to enjoy specific tax benefits on the premium you pay for life insurance and on the money you receive from the policy. Here’s a look for more details.
Tax Benefits on Premium Paid for Life Insurance
According to the Income Tax Act, under Section 80C, a Hindu Undivided Family (HUF) and an Individual, can claim a tax deduction of up to ₹1,50,000 annually for premium payments, to purchase and keep insurance policy active. Make sure to use the income tax calculator to calculate the tax levied accurately before paying it.
You’re eligible to claim the deduction even if you’re a foreign national or a non-resident of India (NRI) who has bought the policy outside India but has taxable income in India. You can avail of the deduction not just for pure life insurance products, but also insurance-cum-investment options, such as a Unit Linked Insurance Plan (ULIP).
The availability of the deduction extends to the spouse and children too (even if they’re financially independent) besides the taxpayer . However, not to the parents (even if they are financially dependent ). An HUF can claim the tax deduction on the premium payable for the life insurance of any of its members.
The deduction is available for up to 10% of the sum assured by the policy provider. Any amount paid beyond this limit is not considered for insurance policies issued on or after April 1, 2012. However, a higher deduction of 15% is available for physically handicapped policyholders. A still higher limit of 20% is available for insurance policies issued before April 1, 2012.
The policies on which you claim any tax benefits must be active for at least 2 years. If you fail to do that, the deductions available in the previous years get reversed and added back to the income earned in the year in which your policy lapses.
You can also receive tax benefits for up to ₹1,50,000 (as an overall limit) on premium payments of an annuity plan, deferred or immediate.
Consider going through the different types of ITR so that you can file the returns under the suitable category.
Tax Treatment of Money Received from an Insurance Provider
As per the Income Tax Act, Section 10 (10D), the money you get from a life insurance provider is tax-free. For that, the premium payment in any of the term years must be up to 10% of the sum assured in case of policies issued after April 1, 2012. A higher limit of 15% is considered for handicapped policyholders to ascertain whether the money is taxable or not. For policies issued between April 1, 2003, and March 31, 2012, the money won’t be taxable if you didn’t pay over 20% of the sum assured as a premium.
Money received from policies issued before April 1, 2003, is completely tax-free regardless of the quantum of premium. This applies to all policies apart from ULIPs and Keymen insurance policies issued after February 1, 2021. Besides the amount payable under Keymen policies, any money received on the policyholder’s demise is completely exempt from taxes.
If the amount payable to the insurance provider is above ₹1,00,000 and the money received is taxable, a 5% tax at source shall be levied on the difference between the premium payment and money payable. It’s debatable whether the difference is taxed under capital gains or income from other sources. Nevertheless, your tax liability would be based on the applicable slab rate, and you can calculate it using the income tax calculator.
If you want to avoid a lumpsum tax payment at the end of the year, you can opt for advance tax payments in instalments. For that, consider choosing and investing in an insurance policy well in advance of the financial year.
Money received from ULIPs issued after February 1, 2021, in which the equity component has always exceeded 65% in the portfolio, shall be treated like listed shares or equity-oriented schemes. Also, as per Section 112A of the Income Tax Act, it would be taxable at flat 10% above the initial exemption of ₹1,00,000 for long-term capital gains. The surrender value of annuities shall be completely taxed if you avail of the deduction as per Section 80CCC of the Income Tax Act. Otherwise, only the difference may be taxed.
For any life insurance or investment-cum-insurance product, consider investing early on. Also, you can conveniently break the tax payable in small instalments at regular intervals through advance tax payments.