Life insurance is a critical part of any tax planning. As we live in the capital-driven world, it becomes vital to ensure the financial safety of our family and for those who depend on us.
COVID-19 pandemic has once again asserted the importance of Life Insurance. This is the reason why people are scrambling to buy Life insurance policies recently. Many notable companies like LIC have seen a massive inflow of cash in the form of premium.
For the taxpayers, buying a Life Insurance is a win-win situation. It ensures financial security and the premium paid is also liable for a tax deduction!
As per the Income Tax Act 1961, the premium paid for life insurance is exempted under section 80C. In this piece of information, we will take a look at the tax benefits under section 80C for Insurance. I will also try to help you understand what the eligibility for the mentioned deductions is.
What tax benefits can you claim on the premium paid for a Life Insurance?
The premium that you pay for life insurance can help you reduce your Gross Total Income. When you buy life insurance in any particular financial year, you can claim a deduction of the premium paid on your Gross Income.
You can claim these deductions for the premium you paid for your policy or the policy for your spouse, and all your children, whether they are minor or adult. Moreover, the Hindu Undivided Family (HUF) can also claim the deductions for the premium paid for its members.
Eligibility and Limitations of the deduction on the premium paid for Life Insurance.
You can claim deductions up to INR 1,50,000/- per Financial year on the premium you pay for Life Insurance.
Let’s say if you are paying the premium of INR 95,000/- per year for yourself and INR 65,000/- per year for your spouse, then the total premium you are paying will be INR 1,60,000/-. You can claim the deduction of maximum INR 1,50,000/-. But if you are paying the total premium of 80,000/-, you can claim the deduction on the full amount.
Note: For the Life Insurance bought before 2012, the premium for this deduction cannot exceed 20% of the total sum assured. Similarly, for the Insurance policy, the premium for this deduction cannot exceed 10% of the total sum assured.
So, if the sum assured for your Life Insurance Policy is INR 12,00,000/-, and you pay the premium of 1,50,000. In this case, you can claim the deduction of INR 1,20,000/- only, which is 10% of your total Life cover.
In which FY can you claim the deduction?
Although there almost every Life Insurance agency offers the grace period for paying the premium after the deadline, it’s important to pay it on time.
The reason is simple. Let’s see an example,
You can claim the deduction on premium for the Financial Year 2019-2020 only if you pay the premium between 1st April 2019 and 31st March 2020. If you pay the premium after the financial year ends, you will be able to claim the deduction on the premium in the next Financial year. In this case, it will be FY 2020-2021.
How the amount received on maturity will be taxed?
There are multiple possibilities regarding the taxability of the amount received at the maturity of the policy. But, in most cases, the amount received at the maturity of any Life Insurance will tax-free.
Let’s take a look at these different conditions
- In case of the death of the insurer where the nominees or beneficiaries’ receive the maturity amount, no tax will be levied on it. There will be no TDS too.
- If the insurer receives the amount on maturity or after surrendering the policy and in any year, the insurer has paid premium more than 10% of the maturity amount, the entire maturity amount will be liable to be taxed, and TDS will also be deducted.
- Suppose the insurer receives the amount on maturity or after surrendering the policy, and premium paid by the insurer every year is less than 10%. In that case, there the amount will not attract any tax.
TDS deduction on the Maturity amount
- If the maturity amount is above INR 1,00,000/- and it is taxable as per the rules mentioned above, 20% TDS will be deducted from it.
- If the Maturity amount is above INR 1,00,000/- and it is not taxable as per the rules mentioned above, no TDS will be deducted.
- If the maturity amount is below INR 1,00,000/-, then the TDS will not be deducted from it in any case.
Conclusive thoughts
Life Insurance is a great way to secure the financial future of your family, and it also helps you in saving tax. So you must have sufficient knowledge about the different deductions.
But as you can see, claiming the deduction is a very complex process when you file your ITR. It’s possible that you might miss out some information resulting in error during the process. So it’s better to take the assistance of Income Tax experts and relax!
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