Many people believe that life insurance policies provide fantastic tax-saving tools. However, if you are not fully aware, you might not receive the anticipated tax advantages of such policies. Therefore, we highlight everything you should know about life insurance policy plans and their tax ramifications.
Despite the tax advantages you can get from having life insurance, there are several restrictions and exclusions you should be aware of when selecting a policy. These clauses decide whether and to what extent your life insurance payments and payouts are eligible for tax exemptions. The appropriate tax treatment of premiums and payouts under a life insurance policy has been briefly addressed below.
Tax Advantages For Paying For Life Insurance Premiums
As you may be aware, Section 80C of the Income Tax Act of 1961 allows for the tax deduction of life insurance premiums up to a maximum of Rs. 1.5 lakh every fiscal year. However, you can only deduct the premium you pay each fiscal year for life insurance you buy for yourself, your spouse, and your kids. Additionally, you must maintain the insurance and continue to pay the premiums for the duration required under Section 80C to continue receiving the tax benefit.
Let’s talk about the highest premium that can be deducted from your gross income in accordance with Section 80C. For example, if your life insurance policy was issued on or after April 1, 2003, but on or before March 31, 2012, you can deduct the annual premium from your gross income up to a maximum of 20% of the actual capital sum guaranteed (excluding any bonus).
The 20% maximum on life insurance was cut to 10% for plans issued on or after April 1, 2012. However, the maximum is increased by 5%, or 15% of the actual capital sum assured, for life insurance policies purchased by people with disabilities or specific diseases (as defined by the Income Tax Act, 1961, and the Rules formed thereunder), and issued on or after April 1, 2013.
Taxes on the Proceeds of Life Insurance
A nominee is eligible for a tax exemption on the amount they receive as a death benefit under section 10(10D) of the Income Tax Act of 1961. This is encouraging for the money your beneficiaries would get if you passed away.
But were you aware that not all life insurance benefits received upon maturity (as opposed to in the event of death) are tax-free? If the annual premium paid during the policy term exceeds the requirements for the actual capital sum assured, as mentioned in the previous section, the maturity proceeds of an insurance policy are taxable at the individual’s slab rates. The insurer must deduct tax at source (TDS) at a rate of 1% on the full payment amount for life insurance plans with a maturity value of more than Rs. 1 lakh that is not excluded under section 10 (10D) of the Income Tax Act, 1961.
Insurance policies in several categories, including protection, investment, health, and retirement, are available from reputed companies that can help you reduce your tax burden. Look up the various types of life insurance policies available and take professional guidance or help if necessary.
For instance, unit-linked insurance plans (ULIPs) and life insurance can save you up to Rs. 46,350 in taxes each year under Section 80C, assuming the highest tax rate of 30% for salaried individuals on Rs. 1,50,000 (the maximum investment allowed under Section 80C). This works out to Rs. 45,000, and if you factor in the 3% education cess of 3% on the amount, it comes to another Rs. 1,350. Hence, the total tax savings work out to Rs. 46,350.
Similarly, there can be tax benefits under Section 80D (provided you add health-related riders to a life insurance policy like critical illness insurance). However, the maximum investment under Section 80D is Rs. 25,000 for self/spouse/dependent children and Rs. 50,000 for senior citizens (over 60).
It’s vital to realize that while tax advantages on premiums and payouts may be an added benefit of life insurance, they are not the primary goal of this sort of policy. The main purpose of life insurance is to provide your dependents with financial security in the event of your passing. Therefore, you must also keep the policy coverage and tenure in mind at the time of purchasing the policy.