Life insurance is one of the key investments that a person can make to ensure the financial security of his loved ones. Life insurance provides an umbrella to protect the insured’s family from any sort of unexpected losses. There are different types of life insurance plans for different goals:
• Endownment plans where a fixed sum is received on maturity of the policy
• Term insurance plan where the sum insured is paid out on death
• ULIP or market linked plans to build a corpus for child education
But another advantage of life insurance is that when you buy life insurance, you also get tax benefits.
What are the tax benefits of a life insurance policy?
A life insurance policy has two different tax benefits. On investing in a life insurance policy, you get a deduction under Section 80C of the Income Tax Act. This deduction is restricted to Rs. 1,50,000. However, the precondition to availing this deduction is that the annual premium paid should not exceed 10% of the sum assured on the life insurance policy. For policies purchased before 1st April 2012, the annual premium paid should not exceed 20% of the sum assured. If the premium exceeds this percentage, then this deduction under Section 80C will not be allowed.
Another important point to consider is regarding surrender of a life insurance policy. The IRDAI has simplified rules related to surrender of life insurance policies. Life insurance policies can be surrendered at any time. However, if a ULIP is surrendered before the completion of 3 years or an endowment plan is surrendered before the completion of 2 years, this deduction will be withdrawn and the amount allowed as a deduction will be considered to be income for the year.
Any amount received on an insurance policy is exempt under Section 10(10D) of the Income Tax Act. Exempt income means this income is not considered to be a part of taxable income for the purpose of filing an Income Tax return. However, for these receipts to be considered as exempt, they need to meet the condition with regards to life insurance premium i.e the life insurance premium needs to be 10% of the sum assured. For policies taken before 1st April 2012, the number stands at 20%. If the annual premium paid out is not within this limit, then the receipts from a life insurance policy will not be exempt. It is very important to ensure these conditions are met to avoid any problems with assessments in the future.
The tax benefit available to a person depends on the amount of deduction and the tax bracket in which the person falls. Depending on these two factors, the tax saved can be calculated.
• Endownment plans where a fixed sum is received on maturity of the policy
• Term insurance plan where the sum insured is paid out on death
• ULIP or market linked plans to build a corpus for child education
But another advantage of life insurance is that when you buy life insurance, you also get tax benefits.
What are the tax benefits of a life insurance policy?
A life insurance policy has two different tax benefits. On investing in a life insurance policy, you get a deduction under Section 80C of the Income Tax Act. This deduction is restricted to Rs. 1,50,000. However, the precondition to availing this deduction is that the annual premium paid should not exceed 10% of the sum assured on the life insurance policy. For policies purchased before 1st April 2012, the annual premium paid should not exceed 20% of the sum assured. If the premium exceeds this percentage, then this deduction under Section 80C will not be allowed.
Another important point to consider is regarding surrender of a life insurance policy. The IRDAI has simplified rules related to surrender of life insurance policies. Life insurance policies can be surrendered at any time. However, if a ULIP is surrendered before the completion of 3 years or an endowment plan is surrendered before the completion of 2 years, this deduction will be withdrawn and the amount allowed as a deduction will be considered to be income for the year.
Any amount received on an insurance policy is exempt under Section 10(10D) of the Income Tax Act. Exempt income means this income is not considered to be a part of taxable income for the purpose of filing an Income Tax return. However, for these receipts to be considered as exempt, they need to meet the condition with regards to life insurance premium i.e the life insurance premium needs to be 10% of the sum assured. For policies taken before 1st April 2012, the number stands at 20%. If the annual premium paid out is not within this limit, then the receipts from a life insurance policy will not be exempt. It is very important to ensure these conditions are met to avoid any problems with assessments in the future.
The tax benefit available to a person depends on the amount of deduction and the tax bracket in which the person falls. Depending on these two factors, the tax saved can be calculated.
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