Life Insurance Taxation

Payment of premium on life insurance policy not only gives insurance cover to a taxpayer but also offers certain tax benefits.

These contributions are eligible for deduction from gross total income, which leads to a reduction in the tax liability.

Give below the FAQ which generally arise to the taxpayer while claiming deduction of Insurance premium paid

Who can avail deduction under section (u/s) 80C of the Income-tax Act, 1961 (Act) with respect to premiums paid on life insurance policies?

An individual or Hindu Undivided Family (HUF) can avail deduction u/s 80C of the Act. Deduction would be available on payment basis.

Is it necessary to pay life insurance premium by cheque only for claiming deduction? Can HUF can pay Life Insurance premium on behalf of karta?

There is no restriction on mode of payment. Life insurance premium can be paid in cash, cheque or by any other mode like, credit card / debit card, net banking, etc.

Are all types of insurance plans qualified for deduction u/s 80C of the Act?

Yes. Taxpayer can take any insurance plan according to his requirement. Term insurance, money back policies, annuity policies, unit-link investment plan (ULIP), whole life plan, group life insurance, etc are qualify for deduction u/s 80C of the Act.

Whether GST on premium can be claimed as deduction u/s 80C?

Yes, GST on premium can be claimed under section 80C.

Are there any restrictions on deduction of premium amount under income tax?

Yes, in accordance to conditions specified under section 80C, deduction is restricted to 20% of premium to actual capital sum assured ratio in respect of policies issued on or before 31-3-2012 and 10% in case of policies issued on or after 1-4-2012.

In case of policy taken on or after 1-4-2013 in the name of any person suffering from disability or severe disability referred to in section 80U or suffering from disease or ailment as given in section 80DDB, the limit will be 15% of capital sum assured.

Can I take deduction of premium paid towards pension plans?

Premium paid towards a pension plan is eligible for a deduction u/s 80CCC subject to maximum limit of Rs 1,50,000. However aggregate deduction u/s 80C, 80CCC and 80CCD cannot exceed Rs 1,50,000

Can I claim deduction of premium paid by taking loan? Is repayment of loan taken on life insurance policy is deductible u/s 80C of the Act?

Yes, Life Insurance premium can be paid out of money taken on Loan, deduction of such premium paid can be taken. However, deduction is available only for life insurance premium payment and not on repayment of loan.

Whether late payment fees or changing nominee fees charged by Life insurance companies are deductible U/s 80C of the Act

No.

What are the tax implications if I terminate the Insurance Policy?

If Life insurance policy is terminated within a period of two years from the commencement of policy, deduction already claimed in earlier years will be considered income in the year in which policy is terminated.

However in case policy is terminated after 2 years amount, deduction already claimed under section 10(10D) would be exempted subject to conditions specified therein.

I have taken rider along with base policy, insurance company is charging separate premium towards rider. Will I get deduction of the premium paid towards rider?

Yes. Premium paid towards accidental death benefit rider or term riders taken along with base policy is allowed as deduction u/s 80C of the Act. And health rider like critical illness rider, permanent disability would be eligible for deduction under section 80D.

I have contributed additional top up over and above the regular premium payable under the unit linked life insurance plan. Will I get deduction of such top up premium paid?

Yes, however the deduction will be subject to conditions specified under section 80C read with section 10(10D).

I have transferred/ assigned my policy to my parents, will I still get deduction of premiums paid?

Transfer or assignment is a method of transferring of all benefits and rights under a life insurance policy to another person. Deduction can be claimed for the premiums paid towards policy which is assigned in the name of your parents,provided that premium would continue to the paid by proposer under section 80C.

Can I claim deduction in current financial year, if premium due in current financial year but paid in next financial year?

No. The deduction u/s 80C of the Act is available on payment basis only. If payment is due as on 31st March 2019 and premium is paid as on 1st April 2019, then deduction u/s 80C can be claimed during financial year 2019-20 only.

I have paid premium multiple premiums at one go, will I get deduction for all premiums?

Yes, but subject to the maximum cap of Rs 1,50,000 and no deduction claimed in respect of such premiums during previous financial years.

I have taken child insurance policy for the benefit of my child, where I am the life assured but premiums are paid by my father. Who will get benefit?

In such case the premiums are paid by your father on the life assured of his son/daughter (you), your father will get the deduction benefit.

Whether returns arises from insurance proceeds attracts any Long Term Capital Gains.

Income Tax law not provide clarity on taxability of Insurance proceeds whether Capital Gain or other income. However, as per normal parlance, these are treated as other income and not long term capital gain. As a result Insurance proceeds does not attract Long term capital gain tax.


Disclaimer:

This information should not be construed as expert tax, legal opinion from TATA AIA Life Insurance Company Limited. TATA AIA Life Insurance Company Limited would not be responsible in any manner for decisions made on the basis of above information. We request you to consult your tax advisor before taking any decision.

What is GST?

GST is a destination-based indirect tax, which is applicable on services performed. In case of inter state sale / supply, IGST would be applicable while in case of Intra State Sale / supply, CGST + SGST will be applicable.

What is Kerala Cess?

As per clause 14 of the Kerala Finance Bill, 2019 (Bill no 185 of fourteenth Kerala Legislative Assemble), the Government have decided to levy a cess called the Kerala Flood Cess for the purposes of providing reconstruction, rehabilitation and compensation needs which had arisen due to the massive flood which occurred in the State of Kerala in the month of August 2018, for the period of two years and the period may be increased basis decision prevailing at the time.

This will be charged extra in addition to existing GST rates

How are the policy owners impacted?

In case Kerala Cess is applicable, it shall be borne and paid by the policyholders in addition to GST.

What are the applicability criteria Kerala Cess?

This is applicable only if the below conditions are met:

  • Sourcing branch is of Kerala [i.e. Agent/Specified Person is mapped to any Tata AIA branch from Kerala]
  • Policy owner’s communication address is of Kerala
  • Policy owner does not have GST number

What is the period for which Kerala Cess is levied?

The Kerala Cesswill be levied for period of 2 years from 1stAugust 2019, the period may be increased basis the decision prevailing at the time.

Is Kerala cess applicable for agent commission?

No. Kerala Cess is not applicable on agent commission

What are the existing GST rates and revised GST rates including Kerala Cess?

The charges are as mentioned below

Plan Type
Existing Effective GST rates
Revised GST rates including Kerala cess
Conventional / endowment plans/TROP - First Year
4.50%
4.75%
Conventional / endowment plans/TROP - Second Year
2.25%
2.38%
All Riders
As per rates in base plan
It will follow base plan
ULIP Charges like Mortality charges, policy admin charges, surrender charges, premium allocation charges etc.
18%
19.00%
Single Premium Annuity
1.80%
1.90%
Term Plans
18%
19.00%
Health Plans
18%
19.00%
FMC charges
18%
18%
Reinstatement Interest
10.38%
10.47%

What is the impact if I generate SIS without Kerala Cess though Kerala cess is applicable?

If SIS is generated basis incorrect details (i.e. agent sourcing branch, policyholder’s state or GST number, wherever applicable) then incorrect GST amount will reflect in generated SIS.

During DST scrutiny or Underwriting, pending for submission of revised SIS with Kerala cess and premium shortage pending will be raised

What is the impact if I generate SIS with Kerala Cess though Kerala cess is not applicable?

If SIS is generated basis incorrect details (i.e. agent sourcing branch, policyholder’s state or GST number, wherever applicable) then incorrect GST amount will reflect in generated SIS.

During DST scrutiny or Underwriting, pending for submission of revised SIS without Kerala cess will be raised and any excess premium collected will be refunded.

Does GST number has any linkage with PAN number?

Yes. GST Number and PAN number have dependency. GST registration number is based on PAN i.e. 3rd character to 10th character of GST number consist PAN number of the policyholder validation have been built in the system to check it. User providing invalid GST/PAN number will not be allowed to proceed further.

What will happen if incorrect GST number is provided?

If incorrect GST number is provided during the journey and subsequently later during GST filing it is found to be incorrect, such GST no. will be removed from the database.

Is Kerala Cess has any impact on reinstatement of policy?

If Kerala Cess is applicable then reinstatement interest rate would be inclusive of Cess hence effective rate would be 10.47% instead of 10.38%.