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Ref. No. KLI/22-23/E-BB/492
Ref. No. KLI/22-23/E-BB/490
Many people believe that life insurance policies provide fantastic tax-saving tools. Here is everything you should know about life insurance and its tax ramifications.
Buying a life insurance plan is very important for people who have dependent family members. The policy will help you protect the financial future of your parents, spouse, and children. When it comes to finding suitable life insurance coverage, insurance companies in India provide a variety of choices.
Key takeaways
Important taxability instances that you need to keep in mind:
How can life insurance plans reduce your tax burden?
When buying a suitable life plan, make sure to learn about the life insurance tax implications so that you can plan your finances accordingly. Here are the important taxability instances that you need to keep in mind.
Under term insurance 80C of the Indian Income Tax Act, 1961, any premium paid towards a life insurance plan for yourself, your spouse, and your children is tax-deductible. An important point to remember is that to get the benefit for any policy issued on or after April 1, 2012, the premium you pay should be less than 10% of the sum insured.
Section 10(10D) of the Income Tax Act allows term insurance tax exemption on the maturity benefit and bonuses received from your life policy. To be eligible for this income tax deduction, the premium you paid must not be more than 20% of the sum assured for policies issued before April 1, 2012, and 10% for the policies issued after April 1, 2012.
There are certain situations when Section 10(10D) does not apply to the maturity benefits. If the premium you paid towards the life insurance policy is more than 10% of the sum assured for policies issued after April 1, 2012, you will not receive the tax benefit. For policies bought before April 1, 2012, if the premium paid is over 20% of the sum assured, then you will not be eligible for the tax benefit. This rule for the taxability of the life insurance maturity amount is an important one to remember.
Since October 2014, insurance companies have been eligible to implicate 1% Tax Deducted at Source (TDS) on the life insurance benefit if the amount is more than ₹1 lakh. It was raised to 5% from the previous TDS of 1% in the Union Budget 2019. TDS is also applicable to the bonuses received by you. When filing your tax return, you are entitled to receive credit for the TDS charged by the insurer.
For a single premium payment life insurance policy, the premium paid is often more than 10% of the sum assured. Hence, the maturity benefit of the policy will be taxable. For example, if you bought a policy with a maturity value of ₹1.1 lakh on September 16, 2013, the single premium will be approximately ₹45,000, which is over 10% of the sum assured. If you surrendered the policy on September 16, 2019, the insurer would charge 5% TDS on the net maturity proceeds.
When you are purchasing term insurance, remember the tax mentioned above implications. You will need to consider them when filing your tax return.
Life insurance plans are a great way to reduce your tax burden and save money. Some life insurance policies, such as term life policies, are exempt from taxes which means you won’t have to pay taxes on any dividends, death benefits, or other payouts. Additionally, life insurance policies also offer tax-deferred growth, which allows your investments to grow without you having to pay taxes on investment earnings until you withdraw the money. This can be a great way to save money in the long run.
Furthermore, with life insurance, you can also use your policy’s cash value to take out policy loans and pay for large expenses without having to pay taxes on the loan amount, which can be an attractive option for those looking to reduce their tax burden. Using a life insurance plan will allow you to reduce your tax liability under the Income Tax Act of 1961. At certain times throughout the insurance, you can receive term insurance tax benefits.
Term insurance plans are eligible for tax benefits under term insurance 80C. The premium paid towards term insurance plans is eligible for a tax deduction of up to ₹1.5 lakhs. This means that the premium paid towards term insurance can be claimed as a deduction while calculating your taxable income, thus reducing your tax liability.
Term insurance plans also offer tax benefits under term insurance under 80D. The premium paid towards term insurance plans can be claimed as a deduction while calculating your taxable income, thus reducing your tax liability. The maximum amount that can be claimed as a deduction under Section 80D is ₹25,000 for individual policies and ₹30,000 for policies taken for senior citizens.
The maturity amount received from a term insurance plan is tax-free. This means that you do not have to pay any taxes on the maturity amount received from your term insurance plan.
The death benefit received from a term insurance plan is also tax-free. This means that your beneficiaries will not have to pay any taxes on the death benefit received from your term insurance plan.
The surrender value received from a term insurance plan is also tax-free. This means that you do not have to pay any taxes on the surrender value received from your term insurance plan.
It’s vital to realize that while tax advantages on premiums and payouts may be an added benefit of life insurance, they are not the main goal of this sort of policy. The main purpose of life insurance is to provide your dependents with financial security in the event of your passing. Therefore, you must first comprehend a policy’s ins and outs in order to make the best tax-planning selection.
For the premiums you pay to maintain your life insurance policy, you may deduct up to ₹1,50,000 annually. Remember that your premium must be less than 10% of the amount assured when requesting the discount.
According to term insurance 80C, tax deductions are available for premiums paid for life insurance policies up to a maximum of ₹1,50,000 as long as the total premium paid during the financial year equals 20% of the policy’s sum assured.
Your life insurance policy’s maturity benefit will be paid to you in full tax-free. This also contains the entire amount of the bonus. Section 10(10D) of the Income Tax Act of 1969 applies to this tax benefit.
Ref. No. KLI/22-23/E-BB/999
Ref. No. KLI/22-23/E-BB/490
