Life insurance is more than a safety net for your loved ones; it also helps you save funds on taxes. The Indian government encourages people to invest in life insurance by offering tax benefits under different sections of the Income Tax Act, 1961. Life insurance provides tax benefits at the stage of paying premiums and also when your family actually receives funds due to an unfortunate event. The essential sections that give these advantages include Section 80C, Section 80D, and Section 10(10D). In this article, we explain all the major life insurance tax benefits you can claim and how they work.
What are the life insurance tax benefits?
Two types of tax* benefits apply to life insurance: deductions on premiums you pay and exemptions on payouts you receive.
Tax deductions
The premium amount you pay for your life insurance policy can be claimed as a tax deduction. This reduces your total taxable income. You can claim a deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh per financial year.
Tax exemptions
The proceeds your family gets from life insurance are exempt from taxation. These include the sum assured and the bonus. This is possible under tax exemption under Section 10(10D) of the Income Tax Act, provided specific conditions are met.
How to save tax with life insurance plans?
The process of saving tax with the help of life insurance is quite straightforward, provided the following steps are taken.
1. Choose the right policy:
Choose a life insurance policy that fits your requirements and budget. Buy a term plan that gives you the suitable coverage at comparatively low premiums.
2. Pay premiums regularly:
Make sure you pay your premiums on time. Only the premiums actually paid during a financial year qualify for tax deductions.
3. Keep premium below 10% of sum assured:
In order to avail the benefit of tax deduction, the annual premium paid for policies issued after April 1, 2012, must not exceed 10% of the sum assured.
4. Maintain policy for minimum period:
Keep your policy active for at least two years. If you surrender it before this, you may lose the tax benefits claimed in previous years.
5. File your tax returns:
Claim the deductions while filing your income tax returns. Keep all premium payment receipts as proof.
Life insurance tax benefits under various sections of the Income Tax Act
There are several tax* benefits on life insurance available under various sections of the Income Tax Act:
Section 80C
Tax@ deduction under 80C allows a deduction of ₹1.5 lakh on life insurance premiums paid for yourself, your spouse, or children. This has been the most widely used section when it comes to tax benefits available on insurance. It includes financial expenditure incurred and investments made in expenses such as amount spent on home loan principal repayment, tuition fees for children, etc.
Section 80D
In case you have a health-related rider added on to your life insurance policy, then the premium for that rider might be deductible under Section 80D. This is independent of the 80C limit and can be as much as ₹25,000 (₹50,000 for senior citizens).
Section 10(10D)
The maturity proceeds or death benefit arising from a life insurance policy are exempted from tax* under this section. It means your family gets the full amount without any deduction of tax*, provided the policy meets certain conditions.
Section 80CCC
The premiums paid towards pension plans from insurance companies can also be claimed for deduction under this section. Again, it is within the overall limit of ₹1.5 lakh prescribed under Sec 80C.
Section 80CCD
Contributions to any specified pension scheme, like NPS subscribed through an insurance company, are allowed as further deductions here over and above the limit of 80C.
Tax benefits on life insurance riders
Life insurance riders add extra protection to your basic policy and can also offer tax* benefits:
- Critical illness rider: The premiums paid for critical illness riders are additionally eligible for deduction under Section 80D and not linked with the limit of 80C.
- Accidental death benefit rider: The premium for this rider normally gets incorporated in the overall policy premium and secures deduction under 80C.
- Waiver of premium rider: The premium for this rider forms a part of the total premium and hence gets covered under Section 80C deductions.
- Hospital cash rider: Premiums paid for hospitalisation riders are also allowed as a deduction under Section 80D, just like health insurance.
- Income benefit rider: The premium paid towards income benefit riders also qualifies for deduction under Section 80C as part of the overall policy premium.
TDS rules on life insurance policies
TDS refers to the amount of tax* deducted at source by the insurance company before making payment of the policy proceeds to you.
When is TDS applicable
- When the total maturity amount or surrender value exceeds ₹1 lakh in a financial year
- When the policy does not meet the eligibility for exemption under Section 10(10D)
- When the premium paid in any year exceeds 10% of the sum assured - for policies issued after April 1, 2012
- When the policy is surrendered before completion of the minimum term required
When is TDS not applicable?
- When the maturity or surrender value is below ₹1 lakh
- When exemption under Section 10(10D) on the said policy is available
- When the premium paid is within 10% of the sum assured
- When the death benefit is paid to the nominee
If your policy meets the conditions under Section 10(10D), TDS is not applicable, and you get the full amount that is paid without any tax* deduction.
Eligibility to claim life insurance tax benefits
To claim tax* benefits on your life insurance policy, the following conditions must be satisfied:
- You need to be an individual or Hindu Undivided Family (HUF)
- The policy should be in your name, your spouse's name, or your children's name
- The premium paid should be within the prescribed limits
- The policy should be maintained for a minimum period of two years to avail Section 80C benefits
- All premium payments must be made through proper banking channels with valid receipts
Conclusion
Life insurance helps to safeguard your family's financial future and also provides vital tax benefits. Knowing the specific sections of the Income Tax Act will ensure that you benefit from tax savings. The premiums paid reduce the amount of your taxable income, while the benefits returned to your family are usually tax-free. Choose a life insurance plan that suits your needs, and make sure it qualifies for the tax benefits you want. Pay your premiums regularly and keep your policy active to enjoy these benefits year after year. With proper planning, life insurance becomes a powerful tool for both financial security and tax savings.
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