Understanding Insurance Tax: Death Benefit Tax Planning Guide

A life insurance policy is a vital constituent in an ideal financial plan. Life is full of uncertainties; you never know when and how much money you will need to cover the expenses in an emergency. If anything happens to you, a life insurance policy provides much needed financial assistance to your family by providing a lump sum amount to cover their expenses without burning a hole through lifelong savings. By only paying a relatively small amount as premium, you get a sum assured larger than your total investment by a margin.

While a life insurance policy is primarily taken to cover a person’s life against any unfortunate event, you can save vast amounts of tax by investing in a life insurance policy. Thus, it can provide you dual benefits of life cover and tax saving by working as an effective tax saving instrument.

Tax benefits under Life Insurance Policies

When you invest in a life insurance policy, you are entitled to a tax deduction under section 80C, 80CCC, and 10(10D) of the Income Tax Act. Tax deductions considerably lower the taxable income of a person. And when you pay less tax, you increase your overall savings. More importantly, the death benefit of an insurance policy is always tax exempt, meaning that your family will be well taken care of in your absence. 

Understanding Death Benefit and its Importance

Not being able to provide for your family is a source of anxiety for most people. And if you are the sole earner/provider of your family, then anything that happens to you will financially endanger everyone dependent on your income. This is why the death benefit provided by a life insurance policy is so important. When an insured person passes away, their family is safeguarded from financial hardship thanks to the life coverage provided by the insurance policy.  

The lumpsum amount provided by the death benefit will allow your family to live comfortably without having to dig into their savings. Moreover, according to Section 10(10D) of the Income Tax Act, all death claims are tax exempt, so the entire sum assured will be paid to your loved ones without any tax deductions. 

Understanding the Various Tax Laws Regarding Life Insurance

Now that you know that insurance death benefits are not taxable, you should also learn about the other tax laws pertaining to life insurance. By knowing about these laws, you can maximise your savings and get the most out of your maturity benefits. Below are some of the main sections of the Income Tax Act that deal with life insurance policies. 

Tax benefits under section 80C

Among other investments that can let you save tax under section 80C, a relatively good way is through investing in a life insurance policy. The terms for tax savings under this section are:

• The deduction is available for Indian individuals (Himself/herself, children, spouse) and HUF (Hindu Undivided Family).
• The maximum amount of deduction under this section is Rs 1,50,000.
• The deduction is allowed for premium only up to 20% of the sum assured, even if the premium paid is more than 20% of the sum assured in a single financial year.
• Only deduction up to 10% premium of sum assured is allowed for the policies issued after 1 April 2012 (15% for the individuals suffering from severe illness).
• If the policy is terminated within two years of the commencement, the benefits received will be reversed.

Tax benefits under section 80CCC

• The deduction is available for Indian individuals (Himself/herself, children, spouse) and HUF (Hindu Undivided Family).
• The maximum amount of Tax deduction under this section along with section 80C is Rs 1,50,000.
• The deduction is available for people who have contributed money as premium towards any Annuity plan that will pay pension in the future.
• If the policy is terminated without two years of the commencement, the benefits received will be reversed.
• Deductions are also not applicable on amounts deposited before 1st April 2006 under Section 80C.

Tax benefits under Sec 10(10D)

• This deduction applies only to the income or sum received under the life insurance plan, viz. maturity benefit/bonus/death benefit of the plan.
• The deduction under this section applies only when the premium paid for the policy does not exceed 20% of the sum insured, if the policy was taken between April 1, 2003, and March 31, 2012. If you bought the life insurance plan after April 1, 2012, then the premium amount cannot exceed more than 10% of the sum insured for Sec 10(10D) deduction.
• Those purchasers who are disabled and/or who qualify under the ‘severe disability individual’ criterion outlined in the policy (read Sec 80U of the IT Act for details) are eligible for tax deduction under this section. Also, those who suffer from a disease as specified under Sec 80DDB of the IT Act are eligible.
• Do note that the income/payout not covered for deductions under keyman insurance policy are considered under Sec 10(10D).

It is a great way to save tax with life insurance and lower your taxable income. You are provided with a life cover, a guaranteed lump sum amount in the event of death or maturity (in certain plans) and you get to save tax that effectively increases your overall savings.

To encourage people to add a life insurance policy to their financial plan, government provides several tax deductions under the Income Tax Act which you can benefit from. We, at Edelweiss Tokio have tailor made plans which you can choose from according to your lifestyle. You can add different riders to make it more comprehensive with the added benefits.

 
Swati Tumar - Travel & Finance Writer   

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.