You generally note life insurance while laying a financial roadmap for yourself. And all for the right reasons. It gives you and your loved ones financial security in case of your untimely or unexpected demise. Though life insurance provides a great financial cushion, coverage is not the only thing that it offers. Now, many of you may or may not know that life insurance offers tax benefits too. Thus, by taking life insurance for yourself, you enjoy two-fold benefits: financial protection and life insurance tax benefits.
What are the Life Insurance Tax Benefits?
The Income Tax Act of 1961 offers life insurance policyholders an opportunity to insure themselves with life insurance while also saving taxes. These tax benefits can be classified into two categories: tax exemptions and deductions.
- Tax Exemptions
This refers to the income that isn’t liable to be taxed. With life insurance, you can enjoy tax exemptions on proceeds or payouts of the life insurance plan, that are received in the form of death or maturity benefit. The details of this benefit are mentioned in the Income Tax Act under Section 10 (10D) subject to certain terms and conditions.
- Tax Deductions
Policyholders are offered the benefits of tax deductions on the premiums of life insurance plans. The details for this tax benefit are mentioned under Section 80C. As per the Income Tax Act, of 1961, you can enjoy tax savings of up to ₹1.5 lakhs.
Important Sections to Understand Life Insurance Tax Benefits
Let’s read the relevant sections of the Income Tax Act to understand life insurance tax benefits in detail.
- Section 80C
This section aids the policyholders with tax deduction benefits. It allows you to cut back on your tax liability. It is applicable to premiums paid for life insurance plans that you may buy for yourself, your spouse, or children.
Limit: Under the Old Tax Regime, the maximum deductions claimed on premiums cannot be more than ₹1.5 lakhs in one year.
- Section 80D
This section mainly deals with tax savings made on premiums of health insurance plans. However, it also benefits life insurance policyholders in case they have critical illness coverage added to their base policy. For example, this section allows tax deduction benefits to individuals who opt for riders. The deductions apply to the premiums of these riders.
Limit: You can make a maximum claim of ₹25,000 per year for yourself, your spouse and your children if you are less than 60 years of age and ₹50,000 per year if you are 60 years of age or older. There is an additional benefit for premium payments for dependent parents as well.
- Section 10(10D)
This section talks about the tax exemptions on the insured person’s death or maturity of the policy. The 100% tax-free financial security to your family members in case of an untimely demise and exemptions on maturity benefit (under certain conditions) for you make life insurance policies an attractive investment option. Remember:
- The total tax exemption under this section is made only if annual premiums do not exceed the limit of ₹5 lakhs. In case the annual premium goes beyond this limit, the benefits get added to your income and become taxable at applicable rates.
- For policies issued after 1 April 2012, if the premium you have paid is less than 10% of the sum assured, the proceeds will be tax-free.
Tax Benefits & Riders on Life Insurance:
Riders on any policy refer to add-ons that enhance the policy’s coverage. Life insurance riders get extra protection and added tax benefits.
- If you choose to add a critical illness rider to your base plan, you can enjoy tax deductions under Section 80D. The maximum deduction is ₹25,000, while for senior citizens, it may go up to ₹1,000,000 (including payment of premium for dependent senior citizen parents).
- In case of the return of the premium rider and your policy, your premium amount increases. Thus, you may enjoy greater tax benefits under Section 80C of the Income Tax Act.
TDS and Life Insurance Policy
Here is how TDS is applied to your life insurance policies.
- Post-2014, if your payouts exceed ₹1 lakh and are not exempted under Section 10(10D), the insurance company makes 1% TDS deductions while making transactions or any proceeds to the insured.
- If your payouts are under ₹1 lakh, no TDS will be charged. However, the income you receive becomes tax liable. You can claim the TDS while filing your tax returns.
- For policy payouts on and after 1st October 2019, a TDS of 5% shall be deducted from your net proceeds.
- The tax treatment for NRI’s are different and needs to be checked separately.
Final Word
Having a life insurance policy can keep your family financially secure in case any adversary occurs to you. Plus, you save on taxes. However, tax benefits shouldn’t be the only factor you should consider while getting a policy for yourself. You should carefully analyse other considerations, like if it aligns with your financial goals, income, and future outlook. You may compare different policies before choosing an ideal one for yourself to make an informed choice.
