Income Tax Benefits on Life Insurance Plans (u/s 80C and 10 (10D))
Some people think that life insurance is an expense. Life insurance provides risk coverage to the life insured. Life insurance helps family members to continue to lead a normal life and do kids’ education without any hassle even in the absence of the earning member. Beyond risk coverage, life insurance also provides income tax benefits u/s 80c and u/s 10(10D) of income tax act, 1961. This article provides various Income Tax Benefits on Life Insurance Plans.
Why it is important to have life insurance?
In case of unfortunate death of earning member, it would affect kids’ education, child marriage and to meet day to day expenses for the family. Here comes life insurance plans. Even in the absence of earning member, the family can continue to lead a normal life for meeting day to day expenses as well as kids education and their marriage. One of the basic steps in financial planning is to have a life insurance plan.
There are various life insurance plans including term insurance, endowment policies, money back policies, insurance cum investment schemes, ULIPs etc.,
- Term Insurance Plans
- Term Insurance with return of premium plans
- Endowment Policies
- Money back Policies
- Insurance cum investment plans
- Unit Linked Insurance Plans (ULIPs)
- Whole Life Policies
- Child Insurance Plans
- Retirement Plans
While basic term insurance plans do not have maturity benefits, some might have periodic benefits and all such plans would have maturity benefits.
Income Tax Benefits on Life Insurance Plans
There are basically two types of income tax benefits i.e. Tax benefits for the premiums paid u/s 80c and tax benefits u/s 10 (D) for the maturity amount with certain terms and conditions.
1) Income Tax Benefits on Life Insurance Premiums paid u/s 80C
- Any life insurance premium paid up to Rs 1.5 Lacs during the financial year is eligible for tax benefit u/s 80c of income tax act.
- Any amount paid higher than this would limit the income tax benefit to Rs 1.5 Lacs only.
- This income tax exemption applies to all life insurance plans listed above.
- This tax exemption applies for all the premiums paid during the financial year 1st April to 31st March.
- In case premiums are paid before 31st March, however, not claimed during that time u/s 80c, one can claim this while filling income tax returns before 31st July.
- Life insurance should be in the name of self, spouse and children only. Other than this, one cannot claim 80c deduction on life insurance. In case of HUF, life insurance premium can be in the name of any of the members of the HUF.
- One should have a minimum holding period of 5 years for ULIP and 2 years for any other life insurance to claim income tax benefit under this section. In case such deduction is claimed earlier, however terminated at later point of time before the minimum holding period, this amount would be treated as income in the previous financial year during the year of termination.
- The premium should be paid only in non-cash mode, except for preventive health checkups, which can be done in cash.
2) Income Tax Benefits on Life Insurance Maturity amount u/s 10 (10D)
- Life insurance maturity amount received is exempted u/s 10 (10D) of income tax act, 1961. However, there are terms and conditions apply here.
- Such maturity amount is exempted only if the yearly life insurance premium does not exceed 10% of the sum assured for the policies taken after 1st April, 2012. This limit is 20% if a life insurance policy is taken before 1st April, 2021. This applies to single premium policies too.
- E.g. If the life insurance policy is taken on 1st January, 2013 with sum assured is Rs 10 Lacs and yearly premium is Rs 1 Lac, then the life insurance maturity amount is exempted from tax.
- Maturity amount that is not exempted from tax u/s 10 (10D) needs to be reported under “Income from other sources” and necessary income tax needs to be paid in the year in which it is received.
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