We all have the pressure of numbers to achieve, targets to meet, all-nighters in offices, working weekends, etc. Amongst all this, there is one more deadline that keep hovering over our heads how to minimize the tax liabilities by effectively planning in advance. One expert advises to invest in mutual funds (with a caveat – subject to market risk, please read the offer documents carefully before investment), while another advises to invest in provident funds (with the risk of constant fluctuation in interest rates and withdrawal rules), while some say to invest in some other tax benefit schemes. And we, the working class, pay heed to all of them. We know it better than anyone else because of our monthly tax EMI’s (or TDS, as it’s legally called); the dire need for tax planning!
So in order to assist you better with your tax analysis, we have tried below to explain the various fundamentals of tax benefits associated with a life insurance policy.
What is Life Insurance?
A life insurance technically is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment.
There can be various types of life insurance products offered by insurance companies in the market which can be broadly classified into:
- Term Insurance (Simplest and cheapest form, payment only in case of death)
- Endowment Policies (Insurance + investment)
- Unit-linked Insurance Plans (Insurance policies with a chance of wealth creation)
- Money Back Life Insurance Policies (Periodic payment of partial survival benefits)
- Whole Life Insurance Policy (Coverage for the entire life of policy holder)
- Pension Plans (Helps in building a retirement corpus)
- Other similar products
Tax Benefits associated with life insurance policies
Benefit on Premium Paid
Let us first try to understand the tax benefits on premium paid under section 80C of the Indian Income Tax Act, 1961 – any amount paid to an insurer to buy or to keep a life insurance policy can be claimed as a deduction by you. This implies that premium paid for a life insurance policy can be deducted from gross total income. And these policies can be for you, your spouse and your children. Some other noteworthy points in this regard are as follows:
- Maximum deduction INR 1.50 lakhs
- To be eligible for deduction, premium paid shouldn’t exceed 10% of the sum assured. For example, if your sum assured is Rs. 10 lacs, you can claim a deduction upto Rs. 1 lac.
Basically, the government rewards you for being smart enough and keeping a contingency provision on your life.
Benefits on Sum received
Under the Section 10(10D) of the Income Tax Act, 1961, the following incomes from life insurance policies are completely exempt from income tax:
- Sum allocated by way of bonus
- Survival or Maturity benefits
- Death benefits
- Surrender value
There is no cap on maximum exemption under this section. Therefore, the claim amount that your family will receive in case of any unfortunate accident or the cumulative maturity benefit shall not be taxed by the government, even if it is Rs.1 crore.
The purpose of this information is not to lean you towards life insurance as the best possible alternative but to help you make an informed decision after evaluating all the available options.
Should you need any further guidance on the subject, please feel free to reach us at www.edelweisstokio.in.