Know The Tax Benefits Associated With Life Insurance

Safeguarding your family’s future is a must and what’s better than having a life insurance plan to do so? Life insurance provides financial security for your loved ones when you are not around and is especially important when you are the sole breadwinner of the family. Do you know that apart from the biggest advantage of acting as a financial shield during uncertainties, life insurance has tax benefits also?

Section 80 C of the Income Tax Act provides deduction in respect of life insurance premium and the maximum deduction allowed is up to Rs. 1,50,000. Apart from several other items provided under section 80C, a taxpayer, being an individual or a Hindu Undivided Family (HUF), can claim deduction under section 80C in respect of premium on life insurance policy paid by him during the year.

You can claim tax deduction if you have taken a life insurance policy for yourself or your spouse or children. In the case of a HUF, the deduction is available in respect of policy taken in the name of any of the members of the HUF. As per Section 80C, the deduction is restricted to 20% of capital sum assured in respect of policies issued on or before 31-3-2012 and 10% in case of policies issued on or after 1-4-2012. Policies taken on or after 1-4-2013 in the name of any person suffering from a disability or severe disability referred to in section 80U or suffering from disease or ailment as given in section 80DDB, the limit will be 15% of capital sum assured. The minimum holding period for a life insurance policy should be 2 years.

Let us understand this with an example. Mr. Rahul had made the following payments to avail the advantage of deduction under Section 80 C in the financial year 2019-20:

A. Premium paid on his life insurance policy of Rs. 10,400. The policy was taken in April 2011 and the sum assured was Rs. 40,000.

B. Premium of Rs. 2,000 on his another life insurance policy. The premium was due in March 2020 but was actually paid in April 2020.

C. Premium of Rs. 30,000 on life insurance policy taken in the name of his wife. The policy was taken in April 2012 and the sum assured was Rs. 2,00,000.

D. Premium of Rs. 30,000 on life insurance policies taken in the name of his three children (one is minor daughter, second is major married daughter and third is major married son, who is a practicing engineer). The policies are term plans and premium on all the policies worked out to be 5% of capital sum assured.

E. Premium on life insurance policy taken in the name of his parents who are dependent on him. Premium paid during the year amounted to Rs. 25,200.

F. Premium on life insurance policy taken in the name of parents of his spouse who are dependent on him. Premium paid during the year amounted to Rs. 2,520.

G. Premium on life insurance policy taken in the name of his younger brother and sister dependent on him. Premium paid during the year amounted to Rs. 5,000.

The deduction will be as follows:
A. In respect of premium of Rs 10,400 on life insurance policy which was taken in April 2011, deduction will be restricted to 20% of capital sum assured. Sum assured is Rs. 40,000 and 20% of the same will work out to be Rs. 8,000. Hence, out of Rs. 10,400, and he will be eligible to claim deduction of Rs. 8,000.

B. In respect of premium of Rs. 2,000 on his another policy (which is due in March), no deduction will be available in current year, since the premium is not paid in the current year. Premium is paid in next year and hence, he can claim deduction of Rs. 1,000 in next year.

C. In respect of premium of Rs. 30,000 on life insurance policy taken in the name of his wife, deduction will be restricted to 10% of capital sum assured. Sum assured is Rs. 2,00,000 and 10% of the same will work out to be Rs. 20,000, hence, out of Rs. 30,000, he will be eligible to claim a deduction of Rs. 20,000.

D. Premium in respect of policy taken in the name of his children works out to be 5% of capital sum assured. Hence, the entire amount of premium of Rs. 30,000 will be eligible for deduction. Further, it should be noted that deduction is allowed for all children irrespective of the fact whether they are dependent/independent, major/minor, or married/unmarried.

E. No deduction is available on account of premium paid in respect of policy taken in the name of any person other than the taxpayer, his spouse, and his children. Hence, no deduction will be available in respect of the premium paid by him on the policy taken in the name of his parents, parents of his spouse, and his brother/sister.

F. Total premium eligible for deduction under section 80C will amount to Rs. 58,000 (Rs. 8,000 + Rs. 20,000 + Rs. 30,000).

Exemption under section 10(10D) on maturity amount received
When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 1 April 2012 and 20% of sum assured for policies issued before 1 April 2012– any amount received on maturity of a life insurance policy or amount received as the bonus is fully exempt from Income Tax under Section 10(10D). Also covered here are policies taken after 1 April 2013, on the life of a person with a disability or a disease specified under Sections 80U and 80DDB respectively, where the amount received on maturity is tax-free provided the premium paid does not exceed 15% of the sum assured.