Life insurance premium has been getting tax breaks at two stages — at the time of payment to insurance company and on receipt of payment from the insurance company. Let us understand the benefits under both the situations.
Benefits for premium paid
Section 80C of the Income Tax Act allows deduction for life insurance premium (LIP) if it is paid for policy for self, spouse and child. The child may be dependent on the parents or not or can even be a married daughter. This can be effectively used for tax planning by parents and earning children.
For earning children, due to various items like provident fund deductions, home loan repayment and tuition fee for children, the limit of Rs 1.50 lakh under Section 80C gets exhausted early and some of the items like LIP may overflow the limit.
Likewise senior citizens, who do not have many items to claim tax benefits u/s 80C, can pay LIP for the children and thus optimise the tax benefits. There is a limit of 10 per cent of the sum assured as premium paid upto which the benefit can be claimed u/s 80C. Excess premium if any is disallowed.
For the differently-abled and those suffering from severe disease, this limit is set at a higher 15 per cent. This deduction is available in all policies whether term plan, traditional plan or Unit Linked Plans (ULIPS).
However, in case the premiums are not paid for first two years or the policy lapses before completion of two years, no deduction is allowed in the year in which the policy is discontinued and the deduction claimed in earlier years is also reversed and taxed in the year in which the policy lapses.
Treatment at maturity
Any amount received on death is tax free under Section 10 (10D). For all other life insurance policies, the maturity proceeds are tax free in case the premium paid in respect of such a policy does not exceed 10 per cent of the sum assured during any of the premium paying terms in case of policies issued after April 1, 2012. The limit is 5 per cent for policies issued between April 1, 2003 and March 31, 2012. If premium for a single year exceeds 10 per cent of the sum assured, the whole of the maturity proceeds becomes fully taxable.
In policies issued for the differently-abled or those suffering from severe ailments, the premium limit is 15 per cent from April 1, 2013. Any money received under Keymen’s Insurance is fully taxable at the time of receipt.
If the amount payable on maturity or otherwise exceeds Rs 1 lakh, the insurance company shall deduct tax @ 1 per cent if the amount is not exempted under Section 10(10D).
The author is a CA, CS and CFPCM