What is a Single Premium Term Plan and its Tax Benefit?
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What is a Single Premium Term Plan and its Tax Benefit?

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What is a Single Premium Term Plan and its Tax Benefit?

Life insurance plan is an important investment you make to attain financial security at a later stage in life. It involves a specific amount known as a premium, which is paid for the contract. In return, the company will pay a specific amount in case of death or at the time of maturity of the policy. A regular premium plan is the same as the policy’s duration. However, you need to consider different options when it comes to premium payment.

Life insurance plans offer a great deal of flexibility in terms of both premium payment and payout modes. Out of the different modes of paying premiums offered by most insurance companies, one of the most sought-after options is single premium payment.

Let’s first understand: what is a single premium life insurance policy? When a policyholder wants to pay the entire premium in one go, they can opt for a single premium term insurance. Apart from this, there are other types of premium payment modes like a limited pay insurance plan, where you pay the amount for a certain tenure like five years, seven years, or ten years, as per the plan or a regular pay insurance plan, where you pay the premium at fixed intervals throughout the policy tenure.

Tax Benefits of Single Premium Life Insurance Policy

Payment of premium in case of a life insurance plan is eligible for a tax deduction as per Section 80C of the Income Tax Act, 1961. You get a maximum limit of ₹1.5 lakh under Section 80C deduction for single premium policy.

Moreover, the taxability of single premium policy on maturity remains exempted under Section 10 (10D) of the Act. Single premium term insurance qualifies for the same benefits. However, not every policy will offer the same benefit that is available in a regular life insurance plan.

Hence, it is always recommended to be careful when choosing the plan.

Conditions for exemption on maturity payout under Section 10 (10D)

In the case of life insurance plans issued after April 1, 2012, the exemption from tax on single premium life insurance is valid only when the premium is less than 10% of the total sum assured. It applies to a single premium term plan as well. In a single payout life insurance plan, the proceeds from maturity will remain tax-free if the minimum sum assured in the policy is ten times the single premium amount paid. Tax Deduction at Source (TDS) of 1% will also be applicable here. Additionally, for a death claim, the proceeds will be tax-free.

What is offered as the sum assured?

In a one-time premium term insurance policy, the company will determine the minimum, as well as the maximum sum assured limit. The minimum amount insured is 1.25 times the amount of the single premium and the maximum amount insured is ten times the single premium.

The dilemma for the policyholder

Policyholders choose a low sum assured because their mortality charge will be high in case of a high sum assured. The mortality charge will increase by investing in a unit-linked insurance plan, and a lesser amount will be invested in financial instruments to earn returns. To make the most of the tax-free amount, consider the sum assured condition involved in a single premium life insurance plan.

Benefits under Section 80C for Single Premium Life Insurance Plan

The premium in online life insurance is valid for a deduction in Section 80C. The maximum amount is ₹1.5 lakh, and the policy should be issued after April 1, 2012. When the amount of premium is more than 10% of the sum assured, the tax exemption will be available up to 10% only.

Tax Implications for the Surrender of Policy

There is a minimum stay period of two years for the policy. If it is surrendered before this duration, the tax deduction allowed previously will be considered as income, and the policyholder has to pay the applicable taxes.

Having understood what is single premium policy and the tax benefits it offers, it is crucial to determine your future goals and then make a decision. When buying an online life insurance policy, you need to plan as per the present scenario and keep the tenure and sum assured in mind.

- A Consumer Education Initiative series by Kotak Life

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