Purchasing life insurance is a necessity in today’s world. This stands true, mainly if your spouse and children depend on your income to survive. Getting a life insurance can result in your family members being financially secure even after you aren’t around any longer. While choosing a plan, you must consider the tax implications of taking a life cover.
Tax Deduction under Section 80C:
Suppose you have paid an insurance premium for a life insurance. In that case, such premium payments are eligible for deduction under section 80C of the Income Tax Act. The deduction under section 80C can be allowed irrespective of your child being a minor, dependent or independent, married or unmarried. The premium that is paid towards a life cover taken with any insurer that is approved by the IRDAI (Insurance Regulatory and Development Authority of India) is eligible for a Section 80C deduction. However, to claim a deduction under section 80C, the premium paid cannot exceed 10% of the sum assured if the policy has been issued after April 1st 2012. For policies issued before April 1st 2012, the premium paid cannot exceed 20% of the sum assured in order to claim this deduction.
It is crucial to note that in a policy covering the life of an individual with a disease referred to under Section 80DDB or a disability referred to under Section 80U, issued after April 1st 2013, the requirement in order to claim the deduction under Section 80C is that the premium may not exceed 15% of the sum assured. This amount does not include the premium, which has been agreed to be returned, or any bonus payment on the policy.
Tax exemption on Maturity amount received under section 10(10D)
When the premium paid on the policy doesn’t exceed 10% of the sum assured for policies issued after April 1st, 2012, and 20% of the sum assured for policies issued before April 1st, 2012– any amount that is received on maturity of a life insurance policy or amount that is received as a bonus is completely exempt from Income Tax under Section 10(10D). Policies taken after April 1st, 2013, on the life of a person with a disease or a disability specified under Sections 80DDB and 80U, respectively, in which the amount received on maturity is tax-free, provided the paid premium does not exceed 15% of the sum assured, is also covered here.
No tax exemption from income tax on the maturity of policies
In situations where the premium paid is greater than 10% of the sum assured – Any money received from a life insurance policy, wherein the premium is greater than 10% or 20% of the sum assured, is fully taxable. To know your life insurance premium, you can use a life insurance calculator available online.
TDS on life insurance policy
If the amount received from a life insurance policy is greater than Rs 1,00,000 on policies not covered under an exemption under Section 10(10D), then a TDS of @ 1% shall be deducted by the insurer before making this payment. This is from October 2014. TDS will also be deducted on payments of bonus. If the amount received is lower than Rs 1,00,000, then zero TDS may be deducted, but the amount received shall be completely taxable. You may claim credit for the TDS deducted in your Income Tax Return. The union budget 2019 proposed to amend the TDS on insurance policy proceeds to 5% on the income in the proceeds payable or paid upon maturity on or after September 1st, 2019.
Tax liability of single premium insurance policies
Taxpayers may not be sure how payouts from a single-premium insurance policy must be treated. Let us understand how taxability works with an example.
Shashank had bought a policy with a maturity value of Rs 1,10,000. He paid one single premium of Rs 45,000 on October 15th, 2013. 10% of the premium is Rs 11,000. The premium of Rs 45,000 is greater than 10% of the sum assured. Hence, the insurance maturity proceeds can be taxable under section 10(10D) of the Income Tax Act aren’t entitled to exemption. Shashank surrendered the policy on maturity on October 15th 2019. In this case, since the maturity payment is more than Rs 1 lakh, the insurance company is legally responsible for deducting tax on the maturity proceeds. The insurance company is legally responsible for deducting tax at 5% of the payment’s income component. This has to be done before releasing the payment to the taxpayer. In this case, the TDS would be on the net maturity proceeds, which means on Rs 65,000 (1,10,000-45,000). 5% on Rs 65,000 is Rs 3,250. The net proceeds receivable by Shashank would be Rs 61,750 (65,000-3,250). While filing his income tax return, Shashank should report the net maturity proceeds under ‘income from other sources’ category. Also, Shashank can claim the credit for the TDS of Rs 3,250 against his tax liability that is determined while filing his return of income.