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Life insurance policies in India offer more than just financial security. They also provide valuable tax benefits that can significantly reduce your tax liabilities. Understanding these benefits can help policyholders make informed decisions and enhance their tax savings, ensuring both financial protection and tax efficiency. Let’s explore the key tax advantages associated with life insurance:
Income Tax on Life Insurance
The premiums paid towards life insurance policies and the payouts received may qualify for tax deductions and exemptions under various sections of the Income Tax Act, 1961. A life insurance calculator can be a useful tool for understanding which policy best suits your needs, enabling you to plan your finances effectively.
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Section 80C: Premiums paid for a life insurance policy are eligible for tax deductions under Section 80C, with a maximum deduction of ₹1.5 lakh in a financial year. However, the deduction is subject to certain limitations based on the sum assured of the policy. For policies issued before March 31, 2012, the premium should not exceed 20% of the sum assured. For policies issued after April 1, 2012, the limit is 10% of the sum assured. Individuals with disabilities who bought life insurance after April 1, 2013, can claim tax benefits only if premiums are 15% or more of the sum assured.
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Section 80D: Although primarily associated with health insurance, Section 80D also applies to life insurance policies that include critical illness riders. You can claim deductions on premiums paid for yourself, your spouse, or dependents. The maximum amount you can claim is: ₹25,000 if the plan covers individuals, spouses, children, and parents less than 60 years old. ₹50,000 if the plan covers individuals, spouses, children, and parents more than 60 years old. Payments eligible for deduction under Section 80D include cashless payments for health insurance premiums, term life insurance with health riders, and preventive medical check-ups.
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Section 10(10D): Under Section 10(10D), the maturity proceeds, death benefits, and bonuses received from a life insurance policy are exempt from tax, provided the policy meets specific conditions. The premium paid should not exceed a certain percentage of the sum assured (10% or 20%, depending on the policy issue date). Life insurance plans issued after April 1, 2023, are eligible for exemption only if the average annual premium is less than ₹5 lakh.
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Section 80CCC: This section permits tax deductions on premiums paid towards retirement or pension plans offered by life insurance companies, up to ₹1.5 lakh per financial year. However, the pension received from such annuities is taxable as per the individual’s income tax slab.
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Section 10(10A) Allows for tax exemptions for individuals who receive a commuted pension from an annuity plan. However, non-commuted or monthly pension is not eligible for the exemption.
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Section 80CCE: This section sets an overall limit of ₹1.5 lakh for deductions claimed under Section 80C, 80CCC, and 80CCD combined.
GST on Life Insurance
A uniform rate of 18% Goods and Services Tax (GST) is applicable to the premium paid for the insurance plan. Non-Resident Indians (NRIs) purchasing an insurance plan within India may be eligible for a waiver on the GST.
TDS on Life Insurance
The Tax Deducted at Source (TDS) on life insurance follows these guidelines:
- The insurer deducts 1% as TDS before payment if the amount received exceeds ₹1 lakh, unless the policy is exempt under Section 10(10D).
- No TDS is deducted if the amount received from the policy is less than ₹1 lakh. However, the received amount is completely taxable.
- As of FY 2024, the TDS on insurance payouts is 2% of the proceeds.
When filing your Income Tax Return, you can claim credit for the TDS.
Tax Benefits on Riders
Life insurance riders, such as critical illness, accidental death, and disability riders, offer additional coverage and can also provide tax benefits:
- Premiums paid for health-related riders, such as critical illness cover, qualify for deductions under Section 80D.
- Premiums for accident and disability riders are eligible for tax deductions under Section 80C.
Eligibility Criteria
Only individuals and members of Hindu Undivided Families (HUFs) can claim exemptions on the premium paid and the maturity payout received. Benefits can be availed by:
- The policyholder
- Spouse
- Dependent parents or in-laws
- Dependent children
Life insurance serves a dual purpose: providing financial security to loved ones while offering significant tax savings. Understanding the various tax benefits under the Income Tax Act and utilizing tools such as life insurance calculators can help policyholders plan their investments efficiently. By utilizing these provisions, individuals can optimize their tax liabilities while ensuring long-term financial stability. Additionally, staying informed about GST, TDS, and rider benefits can further enhance tax planning strategies.
Disclaimer: Tax exemptions are as per applicable tax laws from time to time.
Note: Bonus rates may vary from time to time based on the Company’s Investment Performance.
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