Life insurance Tax Benefits Under Section 80C & 10(10D)

 

How does life insurance work?

 

• When you buy a life insurance policy, you agree to pay premiums in order to maintain your coverage. If you die, the life insurance company will pay a death benefit to the person or people you specified as nominees. Some life insurance policies allow you to receive both death and living benefits.   
• A life insurance calculator can assist you in choosing a death benefit when it comes to coverage quantities. A term life insurance policy protects you for a specific period of time, whereas a whole life insurance policy protects you for the rest of your life as long as premiums are paid. Term life insurance is less expensive than whole life insurance. However, whole life insurance can provide benefits such as cash value accumulation depending upon the terms and conditions of the policy. The amount of a life insurance premium is determined by the type of policy, the death benefit amount, the riders you choose, and your overall health condition and lifestyle habits.

 

Deduction under Section 80C of the Income Tax Act 1961

 

Section 80C allows deductions   from taxable income for insurance premiums paid to insure your own life, the life of your spouse, or the life of your child subject to the conditions specified therein. The deduction under section 80C is allowed regardless of whether your child is dependent or independent, minor or major, married or single. This deduction is available to both individuals and HUFs under Section 80C.

A Section 80C deduction is available for premiums paid to any insurer that has been approved by the Insurance Regulatory and Development Authority of India (IRDAI). However, if the policy was issued after April 1, 2012, the yearly premium paid cannot exceed 10% of the total sum assured in order to claim a deduction under section 80C. For policies issued before April 1, 2012, the yearly premium paid must not exceed 20% of the sum assured.

Furthermore, it is important to note that for a policy issued after April 1, 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB, the premium must not exceed 15% of the sum assured in order to claim the deduction under Section 80C. The term "sum assured" simply refers to the minimum amount guaranteed to the survivor under the policy. This figure excludes any premiums that have been agreed to be returned, as well as any incentive payments made under the policy.

However, the benefit of availing income tax deductions under section 80C is only applicable if you file your returns under the Old Tax Regime. If you opt for the New Tax Regime, this deduction cannot be claimed⁵.

 

Exemption under section 10(10D) of the Income Tax Act 1961 on the Maturity amount received

 

Section 10(10D) of the Income Tax Act 1961 is applicable for benefits, including maturity benefits received under the insurance plan. The death benefit is exempted from any Income Tax in the hands of the nominee irrespective of satisfaction of Section 10(10D) conditions⁶.

However, in the case of maturity benefits, the maturity sum received from a policy will be taxable in the hands of the recipient if the policy does not satisfy Section 10(10D) conditions.

The tax exemption rule of Section 10(10D) on the maturity benefit is as follows -  

 

Tax Exemption for Non-ULIP (Non-Unit Linked Insurance Products) Plans Under Section 10(10D) of Income Tax Act 1961

 

Any amount received on maturity of a life insurance policy or amount received as a bonus is fully exempt from Income Tax, 1961 under Section 10(10D). When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after April 1, 2012, and 20% of the sum assured for policies issued before April 1, 2012, policies taken after April 1, 2013, on the life of a person with a disability or sickness listed under Sections 80U and 80DDB of the Act, where the amount received at maturity is tax-free if the premium paid does not exceed 15% of the sum insured, are also included.

No exemption from income tax on the maturity of policies, where the premium paid exceeds 10% of the total assured - Any money received from a life insurance policy whose premium is greater than 10% or 20% of the sum assured, depending on the case, is completely taxed.
The insurance policies purchased on or after April 2023 with aggregate premium exceeding Rs. 5 lakhs annually will not get any tax exemption under this section.

However, suppose the total premium of all these policies exceeds Rs. 5 lakhs in a year, in that case, only those specific plans will qualify for an exemption under Section 10 (10D) wherein the total premium paid is less than the mentioned limit.

 

Tax Exemption for ULIP (Unit Linked Insurance Products) Plans Under Section 10(10D) of Income Tax Act, 1961

 

In the case of ULIPs bought on or after 1st February 2021, the total maturity benefit amount would be completely exempted from Income Tax if the total annualised premium is up to Rs.2.5 lakhs. If the premium amount is more than Rs.2.5 lakhs, the gains from all such policies would be taxable as capital gain².

The applicable Income Tax would be as follows –

 

• Capital gains up to Rs.1.25 lakhs are tax-free. If the capital gains exceed Rs.1.25 lakh, the excess is taxed at 12.5%. . In ULIPs, there is lock in period of 5 years and hence, the gains would generally be long term only .
• However, if you redeem within the first year, the tax rate will be 20% on the total returns earned from the policy. This would be considered a short-term capital gain³.
• If you pay any top-up or rider premiums in any of the policy years, the total premium calculated for the purpose of taxation of the maturity proceeds would also include the total amount of the top-up or rider premium paid.
  If the top-up or rider premium amount along with the basic premium exceeds Rs.2.5 lakhs in any of the policy years, the gain from such a policy would be taxable as capital gain².

However, the taxation of ULIP policies wherein the total annualised premium is more than Rs.2.5 lakhs applies only to those policies issued on or after 1 February 2021. If you had taken the policy before this date, the entire maturity benefit would be completely exempted from Income Tax even if the annualised premium amount is more than Rs.2.5 lakhs per annum, provided the policy meets the other criteria mentioned in Section 10(10D) of the Act².

Furthermore, under Section 10(10D) of the Act⁴, death benefits are completely tax-free in the hands of the nominee.

 

Wrapping Up

 

Life insurance policies give policyholders and their loved ones the assurance that if a person dies, financial issues will be averted. Understanding how the process works, from purchasing life insurance to submitting a claim and receiving a payout, will help you feel more confidence in your decision to buy coverage.

Sources

1. https://economictimes.indiatimes.com/wealth/personal-finance-news/section-80c-deduction-in-budget-2024-will-the-government-increase-section-80c-limit-under-the-old-income-tax-regime-in-budget/articleshow/111250865.cms?from=mdr
2. https://economictimes.indiatimes.com/wealth/tax/now-life-insurance-maturity-money-will-not-be-fully-tax-exempt-cbdt-issues-new-tax-rules/articleshow/102797642.cms?from=mdr
3. https://economictimes.indiatimes.com/wealth/tax/mutual-fund-taxation-after-budget-2024-new-stcg-ltcg-rates-on-equity-debt-mfs-etfs-fund-of-funds-gold-funds-gold-etfs-explained/articleshow/112310878.cms?from=mdr
4. https://www.livemint.com/money/personal-finance/how-life-insurance-policies-are-taxed-11665145664260.html
5. https://cleartax.in/s/new-tax-regime-frequently-asked-questions
6. https://cgda.nic.in/adm/circular/Income%20Tax-circular-10-01-2023.pdf (Page 45)

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