What tax benefits are available for life insurance in India?

One of the key factors to keep in mind when buying life insurance is tax. Although insurance should not be bought to save tax, the tax savings provided under various sections of the Indian Income Tax Act, make buying insurance “cheaper” as well as an efficient investment for long term savings.

Tax Benefits for Life Insurance:
On Premiums: Section 80C of the Income Tax Act is an effective way for the salaried person to reduce tax liability. Under this section, investments made in the specified instruments are subject to rebate. Currently, the amount available for rebate under section 80C is Rs. 150,000 which can be invested in life insurance premiums, pension superannuation fund, employee provident fund, equity linked mutual fund schemes (ELSS), National Savings Certificates and public provident fund (maximum Rs 100,000). The amount invested in these instruments is eligible for rebate through deduction of the amount from gross taxable income.

The benefits available on eligible categories of investments are as follows:
1. Life Insurance Premium: paid by an individual in respect of
a) himself/herself,
b) his/her spouse, and
c) any of his/her children.
Premium amount paid should not exceed 20% of the sum assured.

2. Pension Plans: Payment made by the individual in respect of a non-commutable deferred annuity (Pension Plan) on the life of:
a) the individual himself,
b) his/her spouse, and
c) any of his children

Note u/s 80CCD(1) Contribution to National Pension Scheme is available for deduction subject to the overall ceiling and maximum10% of salary.

3. Government Employee – deduction for Pension: Sum deducted in accordance with the terms of services from the salary payable by or on behalf of the Government for the purpose of securing a deferred annuity or making provision for his spouse or children.
The sum deducted should not exceed 1/5th of the salary.

4. Provident Fund: Contribution by the employee towards a statutory provident fund or recognized provident fund. Available only to an Individual.

5. Public Provident Fund: Contribution to a public provident fund by an individual or HUF. The contribution may be made to an account standing in the name of:
a) the person himself
b) his/her spouse, or
c) any of his children.

6. Superannuation Fund: Contribution by an employee to an approved superannuation fund

7. National Savings Scheme: Contribution by an Individual or HUF

8. National Savings Certificates: Contribution by an individual or HUF. Any interest accrued on these certificates which is deemed to be reinvested also qualifies for deduction.

9. Annuity Plans: Payment made by an individual or HUF for a notified annuity plan issued by an Insurer.

10. Equity Linked Savings Scheme: Subscription, by an individual or HUF to units of an Equity Linked Savings Scheme notified under section 10 (23D)

11. National Housing Bank: Subscription by an individual or HUF to a deposit scheme or contribution to any pension fund set up by the National Housing Bank.

12. Long term Deposits: Term deposit for a period of at least 5 years with a scheduled bank.

Premiums paid for Health Related Riders: Some of the critical illness, hospitalisation cash and other health related riders attached to a Life Insurance policy may also be eligible for rebate under section 80D of the Insurance Act.

Section 80D provides for deduction in respect of health or medical insurance premium. This deduction is available to both Individuals & HUF. Rs.25,000 is the maximum amount deductible during the year for an individual and Rs 30,000 for a Senior Citizen.

Deduction under section 80D is available for an Individual for insurance premium paid for self, spouse, dependent parents or dependent children. In the case of HUF, deduction is available for premium paid for any member of the HUF.

However, the condition for applicability of deduction is that the premium must be paid by cheque in the previous year out of the income chargeable to tax.

Death Claims and Maturity Benefits: Life Insurance Policies are currently under an EEE regime i.e. that the Premiums Paid, Income earned by the Investments, and payment of Maturity proceeds or claim are all exempt “E” from tax.

Payment by an Insurer on maturity and death claim are exempt from Tax for all eligible Life Insurance policies under section 10(10)(d) of the Income Tax Act. The only policies that are not eligible for exemption on payment on maturity or claim are Single Premium Policies or Policies where the sum assured was less than 5 times the Premium paid.

Pension Plans operate under an EET regime i.e. the Premiums paid for Pension Plans and the income earned by the Investment are exempt from Tax. Pension Plans have three components – a life insurance, a Pension endowment and a Pension annuity. As other Life Insurance Plans, Death benefits paid under a life insurance rider of the Pension Plan are exempt from Tax. A Pension endowment is limited to 1/3rd of the total accumulated amount, and is exempt from tax on maturity. A Pension annuity is clubbed with the individuals other income and is taxable at the normal rates of tax applicable.

However, please note that the provisions of the Income Tax Act given above are applicable for the Financial Year 2017-18; and that these tax provisions change from time to time.

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