Life insurance policies eliminate the fear of leaving behind your loved ones without effective financial protection. Apart from maturity or death benefits, life insurance policies come with tax benefits, with life insurance tax exemptions under Section 80C and Section 10(10D) of the Income Tax Act of 1961.
Let’s dive into the two clauses that impact the taxability of life insurance policies in India.
Section 80C of the Income Tax Act
If you are a resident or a non-resident individual, you can claim a deduction of ₹1.50 lakh annually under section 80C of the Income Tax Act for the insurance premium paid. However, you can claim a deduction only if the annual premium does not exceed 10% of the actual capital sum assured. Individuals suffering from critical illnesses or classified as handicapped can claim an exemption of up to 15% of the sum assured, capped at ₹1.50 lakh every year.
Section 10(10D) of the Income Tax Act
This section defines whether a life insurance policy’s maturity proceeds (survival benefits) will be taxable. The section is applied to all amounts payable under a life insurance policy, including maturity benefits, death benefits, or other bonuses. The taxability of maturity or survival benefits depends on the premiums paid, while death benefits are always exempted from tax.
If you bought the life insurance plan after 1st April 2012, and the annual premium you have paid is more than 10% of the sum assured of the insurance policy, the survival benefits (maturity proceeds) are subject to tax according to your income tax slab. If not, the maturity proceeds are exempt from tax.
However, the premium you must have paid for life insurance policies issued from 1st April 2003 to 31st March 2012 should be less than 20% of the sum assured of the policy to avoid life insurance tax.
Both Indian and foreign insurance companies are eligible for deductions, and there is no upper limit on life insurance tax benefits you can claim under section 10(10D) of the Income Tax Act.
What happens when you surrender your life insurance?
When you surrender the life insurance policy, the insurance company will pay the assured amount after deducting the surrender charges, for which you are not liable to pay the life insurance tax.
TDS on life insurance policies
If the insurance benefits amount to more than ₹1 lakh, insurance companies can charge a 1% tax deductible at source (TDS) on life insurance benefits from 2014. However, the life insurance tax was increased from 1% to 5% in the Union Budget 2019. The bonus you receive is also subject to TDS. However, you are eligible to receive credit for TDS charged by the insurance company.
Life insurance tax on single-premium policies
The premium paid is usually more than 10% of the sum assured for single-premium policies. Thus, you will be liable to pay tax on the maturity benefits received under single-premium insurance policies.
Life insurance policies offer several tax benefits. However, these are subject to certain conditions. As a policyholder and taxpayer, you must be aware of the life insurance tax benefits and how you can make the most of them.
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