Tax Benefits On Insurance Policies – Section 80C

Types of life insurance plans

Here are the types of life insurance plans available in the market –

Term life insurance plan

Term life plans are the most basic insurance plans which promise to pay a benefit in case the life insured dies during the term of the policy. These plans have the lowest premium rates allowing you to choose a considerable sum assured which would be sufficient in taking care of the financial needs of your family in your absence.

Whole life plan

Whole life plans are insurance plans which run for the entire lifetime of the insured till he/she reaches 99 or 100 years of age. These plans pay a death benefit whenever the insured dies before reaching 100 or 99 years of age.

Endowment insurance plans

Endowment insurance plans are savings oriented insurance plans. These plans pay a death benefit if the insured dies during the tenure of the plan. Moreover, if the insured survives till the end of the plan term, a maturity benefit is also paid. The death or maturity benefits are guaranteed. Thus, endowment insurance plans help in creating a guaranteed corpus.

Money back insurance plans

Money back plans are endowment insurance plans which pay a part of the sum assured at regular intervals during the term of the plan. Thus, money back plans provide easy liquidity and pay the benefits at regular intervals to meet your financial needs. Despite the instalment sum assured paid, the death benefit is not reduced. The entire sum assured is paid in case the insured dies during the coverage tenure. On maturity, however, the remaining sum assured is paid.

Pension plans

Pension plans are retirement oriented life insurance plans. There are two variants of the plan. In deferred pension plans you choose the policy tenure and pay premiums doing the tenure. Once the plan matures, the maturity proceeds are paid in instalments called annuities throughout your life. However, if you choose an immediate annuity plan, you pay a lump sum premium and thereafter receive regular annuity pay outs throughout your life. Annuity plans, therefore, help you in creating a source of regular income after retirement.

Unit linked insurance plans

Unit linked insurance plans are insurance plans which give market linked returns. The premiums paid under the plan are invested in market linked funds which give returns depending on the performance of the capital market. Returns under unit linked plans are, therefore, not guaranteed and depends on market movements. However, unit linked plans help give you investment returns along with insurance protection.

Besides these types of life insurance plans, there are rider benefits too which are available under the plan. Riders are additional coverage clauses which enhance the coverage of the base plan by providing additional coverage at minimal premium rates. The popular riders include the following –

• Accidental death and disability benefit rider which pays a benefit in case of accidental death and disablement
• Critical illness rider which pays a benefit in case of diagnosis of a critical illness which is covered under the plan
• Term rider which pays double the sum assured in case of death during the policy tenure whether accidental or natural
• Hospital cash rider which pays daily hospital cash benefit in case of hospitalisation.

Different riders give tax reliefs under different sections.

Now that you know the types of insurance plans, lets understand the benefits which are payable under life insurance plans too –

Benefits paid under life insurance policies

Death benefit

Death benefit is paid when the insured dies during the term of the policy.

Maturity benefit

When the chosen term of the policy comes to an end, the plan pays a benefit. This benefit is called maturity benefit.

Bonus

Under many endowment or money back insurance plans bonus is also paid on maturity or death. Bonus is a part of the profit earned by the insurance company in a policy year. It is not guaranteed and depends on the amount of profit earned by the insurance company.

Surrender benefit

Surrender benefit is paid when the policy is surrendered before the completion of the policy tenure. In case of surrender a part of the sum assured is paid as surrender benefit.

Partial withdrawals

Partial withdrawals are allowed under unit linked insurance plans. Under partial withdrawals a part of the fund value can be withdrawn any time after the completion of 5 policy years. Partial withdrawals give you liquidity.

Now that the plan benefits and plan types have been understood, here is how life insurance policies give tax reliefs –

Tax benefits of life insurance policies

The list of different banks and their interest rates offerings in 2019 are mentioned below. This rates are from lowest 7 days to maximum range of 10 years.

Tax benefit on premiums paid

Firstly, the premiums that you pay for life insurance policies qualify for tax deduction. Premiums paid for all types of life insurance policies, except pension plans, are allowed as a deduction from your taxable income under Section 80C. Premiums paid on pension plans are allowed as a deduction under Section 80CCC. The total deduction which you can claim under Section 80C and Section 80CCC is limited to INR 1.5 lakhs. Moreover, to claim a deduction the following conditions have to be met –

• The premium paid should not be more than 10% of the sum assured. Alternatively, the sum assured should be at least 10 times the premium paid so that the premium is allowed as a deduction. This rule is applicable for all policies which have been issued on or after 1st April, 2012. So, if the premium is INR 25,000 annually, the sum assured should be INR 25 lakhs and above so that the premium is allowed as a deduction. If the premium is INR 30, 000 or any amount which is more than 10% of the sum assured, deduction is available only till the limit of 10%, i.e. INR 25,000
• If the insurance policy is issued on or before 31st March, 2012, premiums paid up to 20% of the sum assured are allowed as deduction. So, if the sum assured is INR 25 lakhs, premiums up to INR 50,000 can be claimed as a deduction
• In case of individuals suffering from severe disability or a severe disease premiums paid up to 15% of the sum assured are allowed as a deduction if the policy is issued on or after 1st April, 2013. So, if the sum assured is INR 25 lakhs, premiums up to INR 37,500 would be allowed as deduction.
• Individuals or Hindu Undivided Families can claim a deduction under Section 80C on the premiums paid
• Premiums paid on the policy bought for self, spouse and dependent children are eligible for deduction
• Deduction is allowed on payment basis. It means that premiums paid in a financial year can be claimed as deduction in that financial year only. For instance, to claim a deduction in the financial year 2018-19, premium should be paid between 1st April, 2018 and 31st March, 2019. If the due date of premium payment is 28th March, 2019 and you don’t pay a premium within the due date but within the grace period on 5th April, 2019, the premium would not be allowed as deduction in the financial year 2018-19. Since it is paid in the financial year 2019-20, deduction would be allowed in 2019-20 only even though the payment due date fell in the year 2018-19.
• If you pay a single premium, the sum assured should be at least 10 times the value of the premium to claim full deduction on the premium paid. If the sum assured is not at least 10 times, then only 10% of the sum assured would be allowed as deduction for the single premium. So, if you pay a single premium of INR 1 lakh, the sum assured should be at least INR 10 lakhs. If the sum assured is INR 5 lakhs, deduction would be available only up to INR 50,000
• The insurance policy should not be surrendered within two years of buying it if it is any other plan except a unit linked plan. For unit linked plans, the minimum holding period is 5 years. If the policy is surrendered before 2 or 5 years, the deduction claimed in the previous years would be added back to your income and then taxed at your income tax slab rate.

Tax benefit on rider premiums paid

Tax benefits on rider premiums depend on the type of rider you select. If you choose accidental benefit rider, term rider or any other rider which does not allow health related benefits, the premium paid for the rider is allowed as a deduction under Section 80C up to INR 1.5 lakhs. However, for health insurance related riders like critical illness rider, hospital cash rider, terminal illness rider, etc., premiums paid are eligible for deduction under Section 80D. The maximum limit under Section 80D is up to INR 25,000 which increases to INR 50,000 if you are a senior citizen.

Tax benefit on policy benefits

The death benefit and maturity benefit received under life insurance plans is tax-free in your hands under the provisions of Section 10 (10D). There is no limit on the exemption that you can claim as the entire proceed is allowed as a tax-free income. However, there are certain conditions attached to claim tax benefits on your policy benefits. These conditions include the following –

• If the policy is issued on or after 1st April, 2012, the sum assured of the policy should be at least 10 times the annual premium paid.
• If the policy is issued on or before 31st March, 2012, the sum assured should be at least 20 times the annual premium paid
• If you are disabled or suffer from specified diseases and the policy is issued on or after 1st April, 2013, the sum assured should be at least 15 times the annual premium amount.

If these conditions are not met and the sum assured is below the minimum percentage specified above, the entire maturity benefit received under the policy would be taxable. In case of death benefit, however, the above-mentioned conditions do not apply. The entire amount of death benefit received under any life insurance policy is allowed as a tax-free income even if the afore-mentioned conditions are not met.

The bonus which is received under traditional life insurance policies (endowment, money back, etc.) is also tax-free in your hands if the above-mentioned conditions are fulfilled.

In case of pension plans, though, tax treatment of policy benefits is different. In a deferred annuity plan, when the plan matures, there is an option for you to withdraw 1/3rd part of the benefit in cash. This withdrawal is called commutation of pension and the amount withdrawn is completely tax-free in your hands. However, the remaining 2/3rd part of the corpus is paid in annuity instalments and each instalment is taxable in your hands. Tax on annuity pay outs is levied at your slab rate.

Tax benefits on surrender value

When you surrender the policy before the completion of the tenure, the surrender benefit that you receive would be allowed as a tax-free income if the following conditions are met –

• The life insurance policy has been held for at least 2 years
• If it is a unit linked plan, the policy should be held for at least 5 years

Tax benefits on partial withdrawals

linked plans allow partial withdrawals and these partial withdrawals are also tax-free in nature.

So, these are the tax implications on life insurance plans which you should know before you buy the plan.