January 18, 2023

Clarifying Life Insurance Tax Benefits: Answering Frequently Asked Questions

Life insurance plans are a beneficial tool to ensure your family’s financial stability after your death. Although this is the main reason people get life insurance, there are several tax benefits with life insurance as well. These tax benefits make life insurance a more attractive option in financial planning and can significantly increase your tax savings. In addition, policyholders may qualify for tax advantages on life insurance under the provisions of the Income Tax Act of 1961.

 

Deductions and exemptions are the two categories of tax benefits that apply to life insurance policies. Let’s examine them in greater detail.

 

What Are The Deductions Under Section 80c Of The Indian Income Tax Act?

Amounts from specific schemes that are subtracted from your taxable income are known as tax deductions. You can avail of the following tax deductions for life insurance policies:

 

  • Section 80(80C), Income Tax Act allows the deduction of insurance premiums (up to ₹1.5 lacs) for plans purchased for the policyholder, their spouse, and their children.

 

  • In any circumstance, the child’s premium can be discounted, irrespective of whether the child is a minor or an adult, dependent or independent, or married or single.

 

  • A single person or a Hindu undivided family may claim a tax deduction on the premium under section 80C. Only if the amount of premium paid does not exceed 10% of the amount insured is the deduction permitted. This applies to policies that were issued after April 1, 2012.

 

  • Up to 20% of the premium paid for insurance issued before April 1, 2012, may be claimed.

 

  • Suppose the policyholder has a disability or sickness listed under 80(U) or 80DDB. In that case, they may be eligible for a tax credit of up to 15% of the amount for policies issued after that date.

 

  • The maximum exemption under this section is Rs. 1,50,000 for life cover insurancepremium payments. 

 

What Are The Tax Exemptions Under Section 10(10d) Of The Income Tax Act?

Tax exemptions are sums associated with specific plans that are not included in your taxable income. Life insurance policies are subject to the following tax exemptions:

 

  • Policies issued after April 1, 2012, with premiums that exceed 10% of the sum guaranteed, are tax-free and pay out the whole amount at maturity.

 

  • Policyholders whose policies were issued before April 1, 2012, and whose premiums totalled more than 20% of the sum insured will also get the entire maturity amount.

 

  • Policies issued after April 1, 2013, and held by people eligible for benefits under sections 80(U) and 80DDB but whose premium exceeds 15% are also eligible to receive the entire amount at maturity.

 

Frequently Asked Questions: Tax Benefits of Life Insurance

 

Here are some frequently asked questions regarding life insurance and its tax benefits. 

 

  • When life insurance coverage matures, will we receive life insurance tax benefits?

Life insurance’s tax advantages go beyond the premium you pay during the course of the policy. For example, according to Section 10(10D), the maturity proceeds of a life insurance policy are tax-free as long as the annual premium you pay does not, for policies issued after March 31, 2012, exceed 10% of the basic sum assured at any time during the term.

 

  • What Tax Benefits are there for Purchasing a Unit-Linked Insurance Plan?

Only if you continue making premium payments for ULIPs for at least five more years will you be eligible for the income tax advantages of life insurance. You are not eligible to claim the income tax deduction for the prior year if you decide to terminate the ULIP plan before five years have passed. Additionally, the deduction you have previously claimed in prior years will be counted toward your income in the year the policy is cancelled. ULIP plans issued on or after February 1, 2021, with premiums payable in any fiscal year during the policy tenure exceeding Rs. 2,50,000 in respect of more than one ULIP, would be subject to the most recent amendment in Budget 2021. The deductions are up to Rs. 1,50,000 under Section 80C for the premiums paid. 

 

  • How much income tax can I save by paying the premium for life cover insurance?

A life insurance policy’s ability to reduce your taxable income depends on several elements, including the kind of policy it is and the premium you pay. You are eligible to avail of a tax deduction for the life insurance premium up to Rs. 1,50,000 per year under Section 80C.

 

  • When purchasing a life insurance policy, should they only consider tax benefits?

Although there are tax advantages to buying life cover, this should not be your primary motivation. Instead, you should consider the plan’s various components, such as the duration of the life insurance policy you select, the required premium, the inclusions and exclusions of the policy, and the coverage amount. 

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