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What Is Single Premium Term Plan and Its Tax Benefit?

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  • 12th Nov 2019
  • 5,686
What Is Single Premium Term Plan and Its Tax Benefit?

Single premium payment is when you want to pay the entire premium in one go, you can opt for a single premium term insurance. Apart from this, there is one more category, which is 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.

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. In a regular premium plan, the payment tenure is the same as the policy’s duration. However, you need to consider different options when it comes to the premium payment.

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. This amount has a maximum limit of INR 1.5 lakh. Moreover,maturity benefits remain exempted from tax under Section 10 (10D) of the Act.Single premium term insurance will qualify for the same benefits. However, not every policy will offer the same benefit that is available in a regular life insurance plan. Hence, be careful when choosing the plan.

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

In the case of life insurance plans, which are issued after April 1, 2012, the exemption from tax is valid only when the premium is less than 10% of the total sum assured. It is applicable to 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 10 times of the single premium amount paid. Tax Deduction at Source (TDS) of 1% will also be applicable here. For a death claim, the proceeds will be tax-free.

What is offered as the sum assured?

In a one-time 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 10 times the single premium.

Dilemma for the policyholder

Policyholders choose a low sum assured because their mortality charge will be high in case of a high sum assured. By investing in a unit-linked insurance plan, the mortality charge will increase 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 life insurance plan

The premium in online life insurance is valid for a deduction in Section 80C. The maximum amount is INR 1.5 lakh and the policy should be issued after April 1, 2012. When the mount 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.

It is crucial to understand the tax benefits of single premium life insurance and then make a decision. You need to plan as per the present scenario and keep the tenure and sum assured in mind when buying online life insurance policy.

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- A Consumer Education Initiative series by Kotak Life


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