Life insurance is beneficial in providing a financially secure future for your family, and it also helps save money through income tax exemptions. Among the various benefits associated with a life insurance policy, tax deductions are undoubtedly one of the most sought-after ones.
Key takeaways
- Section 10 (10D) of the Income Tax Act of 1961 deals with the taxation of certain sums received by an employee or a nominee of an employee.
- The main benefit of Section 10 (10D) is that it offers tax exemption on the proceeds of the life insurance policy.
- Section 10 (10D) covers payments made to an employee or a nominee of an employee in the form of compensation or any other payment.
- The background of Section 10 (10D) can be traced back to the recommendations of the Fifth Pay Commission.
Section 10 (10D) is an essential provision in the Income Tax Act, 1961 that deals with the taxation of life insurance policies in India. It allows sum assured or maturity benefits on a life insurance policy to be exempted from tax. The section lays down the guidelines for calculating the tax implications on proceeds from life insurance policies.
Given the significant role that life insurance policies play in financial planning, it is essential to understand the tax implications of such policies. By being aware of Section 10 (10D), policyholders can make informed decisions and also manage their tax liability efficiently. It is important to note that the provisions of Section 10 (10D) are subject to change based on amendments made to the Income Tax Act. Therefore, policyholders must stay updated with the latest developments in taxation laws to ensure they comply with the regulations and avail of the benefits available to them.
What is Section 10 (10D) of the Income Tax Act of 1961?
Under Section 10 (10D) of the Income Tax Act, 1961, an individual can avail of tax exemption on the sum assured and accrued bonus (if any) received through their life insurance policy claim (maturity or death benefit). This exemption is also applicable for the returns earned from a ULIP and available on all forms of life insurance policy claims.
Also Read: What is Section 10D of the Income Tax Act?
Importance of Understanding Section 10 (10D)
Section 10 (10D) is an important provision under the Indian Income Tax Act 1961. While purchasing a life insurance policy, it is essential to understand the terms and conditions of the policy to make informed decisions. One of the most important sections of a life insurance policy is Section 10 (10D), which deals with the tax implications of the policy. Understanding Section 10 (10D) is crucial as it determines the taxability of the policy proceeds and the tax benefits that the policyholder can avail of.
Background on Taxation Under Section 10 (10D)
Section 10 (10D) of the Income Tax Act 1961 is an important provision that deals with the taxation of life insurance policies. This section was introduced in the Finance Act 2003 and has undergone several amendments since then.
The main objective of Section 10 (10D) is to provide tax benefits to policyholders who purchase life insurance policies. According to this section, the proceeds of a life insurance policy are exempt from tax if certain conditions are met.
- Firstly, the exemption applies only to policies that satisfy the minimum sum assured requirement. The sum assured should be at least 10 times the annual premium paid for policies issued on or after April 1, 2012, and 5 times the annual premium for policies issued before that date.
- Secondly, the exemption is applicable only if the policy is not surrendered or terminated during the policy term. If the policy is surrendered or terminated before the completion of the policy term, the exemption will not be available. However, the exemption will be available if the policy is surrendered or terminated due to the death of the policyholder.
- Thirdly, the exemption is applicable only to policies issued on or after April 1, 2003. Policies issued before this date are not eligible for the exemption.
- It is important to note that the exemption under Section 10 (10D) applies only to the proceeds of a life insurance policy and not to the premiums paid. The premiums paid for a life insurance policy are not deductible from the taxable income of the policyholder.
Apart from the exemption under Section 10 (10D), there are other tax benefits associated with life insurance policies. The premiums paid for life insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act. The maximum deduction allowed under this section is ₹1.5 lakh per annum.
In addition to this, the maturity proceeds of life insurance policies are also exempt from tax under Section 10 (10D) of the Income Tax Act. This exemption is available even if the sum assured is less than the minimum sum assured required for exemption under Section 10 (10D).
Understanding Section 10 (10D): Eligibility Criteria, Benefits, and Exemptions
Section 10 (10D) of the Income Tax Act is an important provision that offers tax benefits to individuals who have purchased life insurance policies. The provision is designed to encourage people to invest in life insurance, and it provides several tax benefits and exemptions to policyholders.
Eligibility Criteria
To be eligible for tax benefits under Section 10 (10D), the policyholder must meet certain criteria. These include
- The policy must be a life insurance policy, which means that it must provide coverage in the event of the policyholder’s death.
- The policy must be in force for a minimum of two years. If the policy is surrendered or canceled before this period, the tax benefits will not be available.
- The policy must be issued on or after April 1, 2012.
Benefits
The main benefit of Section 10 (10D) is that it offers tax exemption on the proceeds of the life insurance policy. This means that the death benefit paid to the nominee or legal heir of the policyholder will not be taxable. Additionally, the maturity benefit received by the policyholder at the end of the policy term is also exempt from tax.
Exemptions
There are certain exemptions available under Section 10 (10D). These include:
- The proceeds from a life insurance policy received by the legal heir or nominee are exempt from tax under Section 10 (10D).
- The maturity benefit received by the policyholder is also exempt from tax, provided the premium paid on the policy does not exceed 10% of the sum assured.
- If the policyholder transfers the policy to another person, the tax benefits under Section 10 (10D) will continue to be available to the new policyholder.
How Section 10 (10D) works?
Suppose Mr Kumar purchased a life insurance policy for ₹5 lakhs, and he has been paying an annual premium of ₹50,000. After five years, he decides to surrender the policy, and the surrender value is ₹3 lakhs. In this case, the surrender value of ₹3 lakhs will be exempt from tax under Section 10 (10D) since the policy has been held for a period of more than two years.
Steps to Calculate The Taxable Amount Under Section 10 (10D):
Determine the proceeds received from the transfer of the life insurance policy.
Subtract the premium paid from the proceeds received to arrive at the taxable amount.
If the policy were transferred before the completion of two years, the entire amount would be taxable. However, if the policy was transferred after the completion of two years, the taxable amount will be calculated as follows:
a. For policies taken on or after April 1, 2003, but before April 1, 2012: The taxable amount will be calculated as the lower of the following two amounts:
i. 20% of the proceeds received from the transfer of the policy
ii. The total amount of premiums paid for the policy till the date of transfer.
b. For policies taken on or after April 1, 2012: The taxable amount will be calculated as the lower of the following two amounts:
i. 10% of the proceeds received from the transfer of the policy
ii. The total amount of premiums paid for the policy till the date of transfer.
Best Practices for Utilizing Section 10 (10D)
Life insurance policies are designed to provide financial protection to the policyholder’s loved ones in the event of their untimely death. Section 10 (10D) of a life insurance policy is an important feature that allows policyholders to make partial withdrawals or loans against the policy’s cash value. This provision can be an essential tool for managing finances, but it’s important to use it correctly to maximize its benefits. Here are three best practices for utilizing section 10 (10D) of life insurance policies:
Understand the Policy’s Terms and Conditions
Before utilizing section 10 (10D) of a life insurance policy, it’s essential to understand the terms and conditions of the policy. Review the policy document carefully, paying attention to the fees, interest rates, and any penalties associated with withdrawals or loans. It’s also important to understand how the cash value of the policy is calculated, as this will determine the amount that can be withdrawn or borrowed. If you have any questions about the policy’s terms and conditions, contact your insurance provider or financial advisor for clarification.
Use Section 10 (10D) Strategically
Section 10 (10D) of a life insurance policy can be a valuable tool for managing finances, but it’s essential to use it strategically. Consider using this provision to fund short-term expenses, such as a child’s college tuition or unexpected medical bills. However, it’s important to remember that any withdrawals or loans made against the policy’s cash value will reduce the death benefit paid out to your beneficiaries. Therefore, it’s best to use section 10 (10D) sparingly and only when it’s absolutely necessary.
Monitor The Policy’s Performance Regularly
Life insurance policies are long-term investments, and the performance of the policy can change over time. It’s important to monitor the policy’s performance regularly to ensure that it’s still meeting your financial needs. Check the cash value of the policy and review the policy’s fees and charges periodically. If the policy is not performing as expected, consider speaking with your insurance provider or financial advisor to discuss your options.
Conclusion
Therefore, it is recommended that you clearly understand the different tax benefits available under various sections of the Income Tax Act of 1961. Conducting extensive research online and using reliable sources to make the comparison is an easy means to achieve this.
FAQs
1. Points to remember about Section 10 (10D) of the Income Tax Act, 1961
Some noteworthy features include
1. If the maturity benefit that you are eligible for under your insurance policy does not qualify for an exemption under the Section 10 (10D), then the amount you receive from the policy will be subjected to TDS (tax deducted at source) under the following scenarios:
a. When an individual has not provided a PAN card, 20% TDS is applicable on maturity benefit.
b. When an individual has provided a PAN card, 10% TDS is applied to full maturity benefit.
2. Exceptions under Section 10 (10D) of the Income Tax Act, 1961
Some of the exceptions under Section 10 (10D) include the following:
The amount obtained under Keyman Insurance Policy.
Any amount obtained from an insurance policy issued on 1st April 2003 and before 31st March 2012. The premium amount for any year during the policy term exceeds 20 % of the actual sum assured.
Any amount obtained under a policy issued after 1st April 2012 with the premium amount during the policy term exceeds 10 % of the actual sum assured.
3. Terms and conditions for availing tax exemption under Section 10 (10D)
This section provides income tax deductions on any sum obtained through an insurance plan’s maturity, death benefit, and bonus.
Premium paid during any year for a policy cannot be more than 20% of the sum assured for life insurance bought between 1st April 2003 and 31st March 2012.
Payout, which is not eligible for tax deduction under the keyman insurance policy, is eligible for deductions under this section.
For policies bought after 1st April 2012, the premium payment cannot exceed 10% of the assured sum.
