The real purpose of purchasing life insurance is to avoid tragic stories like this. But many still wrongly feel, that life insurance is a waste of money. But luckily and thanks to our government’s tax-saving policies, they still end up buying some insurance for secondary reasons like using Section 80C tax benefits.
Better something than nothing at all. Right?
Nevertheless, the main purpose of buying life insurance is to financially secure your dependents. The tax benefit on premium paid for a life insurance policy (may it be term plans, traditional moneyback or endowment plans or Ulips) is an important additional advantage of life insurance.
This post details the income tax benefits on insurance plans in India (like income tax benefits on term plans, income tax benefits on endowment plans, income tax benefits on single premium plans, income tax benefits on money back policies, income tax benefits on Ulips).
And please note that we are not just concerned about the Section 80C benefit on insurance premiums you pay year after year. It is also important to focus on whether the maturity benefits of all life insurance policies are tax-free in your hands or not. This is one angle that is often neglected at the time of buying insurance.
Note – Some people have this confusion that the life insurance policy taken from LIC alone will qualify for tax benefits under section 80C and Section 10 (10D). This is incorrect. Tax benefits on life insurance policies are valid irrespective of whether it is purchased from LIC or from any other private insurance company (approved by IRDAI).
So let’s move on and understand various taxation aspects on life insurance policies as per the latest income tax laws in India:
Tax Deductions (on Insurance Premiums) under Section 80C
First question – Are premiums paid on life insurance tax deductible?
The answer is – Yes. You can avail tax benefits on the premiums paid for purchasing/renewing life insurance policies (for self, spouse, children).
Second question – How much life insurance premium is tax deductible?
The life insurance premium paid should not exceed 10% of the sum assured of the policy (where the policy has been issued after 1st April 2012).
What does it mean exactly?
Suppose you purchase life insurance with a cover of Rs 5 lakh (sum assured) with an annual premium of Rs 63,000. In this case, the premium paid (i.e. Rs 63,000) exceeds the 10% limit of sum assured (Rs 50,000 = 10% of Rs 5 lakh). So you will only get a tax deduction on the Rs 50,000 and not on the full Rs 63,000). Any premium in excess of the limit (10% of Sum Assured) will not qualify for tax deduction under section 80C of the Income Tax Act.
Remember, this 10% limit is for policies issued after 1st April 2012.
For policies issued before 1st April 2012, the premium paid should not exceed 20% of the sum assured in order to claim this deduction.
To summarize the tax deductions on premiums paid for life insurance policy under Section 80C:
- For life insurance purchased before 1st April 2012: The tax deduction is applicable only for the premium which is up to 20% of the sum assured.
- For life insurance purchased after 1st April 2012: The tax deduction is applicable only for the premium which is up to 10% of the sum assured.
- Additionally, for insurances issued on or after 1st April 2013 (to a person suffering from disability/ailment), the maximum deduction is up to 15% of the sum assured.
Now you know that it is not necessary that the full life insurance premium you paid will be available as a deduction for tax saving.
One more thing – the life insurance premium paid can be claimed for deduction under section 80C only in the financial year in which it is paid.
That said, whatever be the tax deduction available after the 10% sum assured rule (discussed above), the overall deduction will be limited by the Rs 1.5 lakh limit set for Section 80C of the Income Tax Act, 1961 for maximum tax benefit.
So that was about the tax benefits (deduction) that you get while paying the insurance premiums.
Now let’s discuss what happens on maturity of the policy?
Taxation of Insurance Maturity under Section 10 (10 D)
Most people are blinded by the tax benefits being offered during the premium payment phase. They forget to check whether the maturity amount from their insurance policies will be tax-free or not.
Interestingly, most people have this impression that the maturity proceeds of life insurance policies are fully tax free.
But this is not always the case.
There are certain conditions (scenarios) where the insurance maturity amount is not tax-free. So if you are an insurance holder (endowment, moneyback, etc.), then it is in your best interest to understand the taxation of insurance policy maturity amount under Section 10 (10)D of the Income tax Act.
So what does the Section 10 (10D) of the Income Tax Act, 1961 say?
- For life insurance purchased before 1st April 2012: If the premium paid exceeds 20% of the sum assured, then the policy maturity proceeds would be taxable in the hands of the insured person.
- For life insurance purchased after 1st April 2012: If the premium paid exceeds 10% of the sum assured, then the policy maturity proceeds would be taxable in the hands of the insured person.
- Additionally, for insurances issued on or after 1st April 2013 (to a person suffering from disability/ailment), the above-mentioned limit stands at 15%
So if you were asking are maturity benefits of all life insurance policies tax-free, then now you know that in case the premium paid in any year exceeds 10% (or 20% for policies issued before April 2012) of sum assured, then the whole maturity proceeds would be taxed in the year of receipt.
That was about the maturity proceeds.
But in case of death of the insured person, the death benefit received shall be tax free in the hands of the nominees (even if the premium paid in any year crossed the percentage limit 10% of the sum assured).
Exemption under section 10(10D) on Maturity amount is granted only if the premium paid in any year does not exceed 10% of the sum assured for the policies issued after 1st April 2012 and 20% of sum assured for policies issued before 1st April 2012. That is the main fine print that you should be aware of when planning to buy a life insurance policy.
Section 80C + Section 10 (10D) Life Insurance Taxation
If we combine the limits and details in these two sections, then this is what we get:
If the policy is purchased after 1st April 2012 and premium is more than 10% of the sum assured, then:
- Only that premium will be eligible for tax deduction under Section 80C which is equal or less than 10% of the sum assured.
- On maturity, the insurance maturity amount will be taxed as the premium was more than 10% of the sum assured. This is a bigger hit for insurance buyers and comes several years later when its already too late to do anything.
So in your best interest, if you are planning to buy life insurance, do not ignore the tax angle. Make sure that the premium paid is not more than 10% of the total sum assured. Because if you don’t and the premium is more than 10% of sum assured, then only a part of the insurance premium will be tax deductible. If that wasn’t bad enough, the maturity proceeds of the insurance policy will also be taxable at the time of maturity.
If in doubt and if you feel your insurance agent is fooling you, throw your knowledge of the 10% rule of Section 80C and 10(10D) on him. He will be forced to revise his claims if he is lying.
There are various life insurance products like endowment plans, moneyback plans, whole life plans. But the most effective life insurance is Term Insurance. All others mix insurance with investments which results in underinsurance and poor returns on maturity.
I have long advocated that Term Life Plan is the best life insurance option for most people. But also remember that unlike Unit Link Insurance Plan and traditional insurance plans, there is no maturity amount in term plans. Only death benefits.
But nevertheless, whenever you are purchasing insurance, it is important to understand how much of your premiums will get tax deducted and what is the taxability of life insurance maturity payout. Since most people buy insurance as a tax saving & investment product, these important things get overlooked. That said, it’s wrong and you should never purchase a financial product just to save taxes.
So hopefully, you now have a better idea about the taxability and income tax benefits of the Life insurance plans in India (2023).