Analyzing taxability and tax benefits of Life Insurance Policy

What is Life Insurance?

Life insurance is a legally binding contract drawn between a policyholder and an insurance company. The purpose of it is to serve as a sinking fund. A considerable amount of money also known as the death benefit is issued to the family of the bereaved upon the death of the insured person. This is done in exchange for the premium payments made under different categories of life insurance policy by the individual. Some of the schemes are as follows:

• Whole Life Insurance
• Term Life Insurance
• Universal Life Insurance
• Variable Universal Life Insurance

Can you possess more than one life insurance policy?

Yes, it is legally possible to hold as many insurance policies as you please. This is where group life insurance offered by an employer for his whole company comes into the picture. But this policy does not have maximum coverage. Depending on the additional coverage you require, you can opt for a new policy rather than increasing the coverage on the policy you are already holding. This would ultimately cost you less and add more benefits to your plate.

As per the Income Tax Act 1961, the provisions of Section10(10D) offer tax exemption on the premiums paid to the insurance policy or the actual sum assured when the policy matures along with policy proceeds for nominee adhering to the conditions that fall under it. This exemption is also applicable for the returns earned from a Unit Linked Insurance Plan (ULIP) and Single Premium Life Insurance. It should be noted that provisions under Section 80C provide only deductions whereas, provisions under Section 10(10D) offer exemptions. These exemptions can be availed for all life insurance payouts.
Moreover, there is no specified upper limit of exemption under this Section.

On one hand, is the financial security offered to the nominee after the insured person’s death and the other is the deduction from the total income paid through the premiums collectively. Under Section 10(10D), the money received as a death benefit is exempted from any sort of taxation. Even the accrued bonuses received along with it are exempted from taxes.

• For Key Man insurance policies the proceeds are not applicable for tax exemptions under the same Act.
• Any amount of money received under Section 80DD (3) or 80DDA (3) of the Income Tax Act.

Conditions for tax exemption under Section 10(10D) for term insurance policy

• The premium payable for the policies bought between the period of 1st April 2003 and 31st March 2012 should not be more than 20% of the sum assured.
• For every policy that is purchased after 1st April 2012, the amount paid periodically to the insurer should not be more than 10% o the sum assured. In other words, the actual capital sum assured must be at least ten times the amount being paid as a premium.
• The premium payable for any year during the term of policy should not exceed 20% of the capital sum assured.
• The premium payable for a definite number of years crosses 15% of the assured sum of capital under two conditions:
  1. If the policy is taken for an individual with some time acute disability as per Section 80U.
  2. As per the conditions listed on Section 8DDB, if the policy is taken for an individual with a disorder or suffering from an ailment.
• Tax Deducted at Source (TDS) of 1% is applied when the compensation amount received on policies that do not come under Section 10(10D) exceeds rupees 1,00,000 by the company before making the payment. The PAN of the policyholder is also made available to the insurer.

Understanding Section 80C

Section 80C came into effect in the year 2006 and it is the most favored and the popular of all the tax-saving options made available. Deductions under this Section permit the taxpayer to claim a maximum deduction of rupees 1.5 lakhs from the individual’s annual income. The taxpayers can make eligible investments in life insurance, Public Provident Fund, different savings schemes et cetera, or carry out some expenses that will help them save on the taxes they pay.

Eligibility and conditions for tax exemption under Section 80C for term insurance policy

• Tax exemption under this Section is only eligible for individual taxpayers and Hindu Undivided Family (HUF). This implies that corporate companies, partnership firms, and other business entities are not qualified to avail an exemption.
• Section 80C has multiple subsections like 80CCC, 80CCD (1), 80CCD (1b), 80CCD2. These give the investor a comprehensive idea of which should be opted by them.
• Investments in the Equity Linked Savings Scheme (ELSS) are also eligible for tax deductions under Section 80C. This savings scheme has the least holding period of just three years.
• Tax benefits for the contributions made to the taxpayer’s own Public Provident Fund or the individual’s spouse or children are also eligible.
• Educational expenses for not more than two children in India are permitted for tax benefits.
• By depositing money in Senior Citizen Savings Scheme (SCSS) for not more than five years. A default lock falls over the account and becomes taxable if not withdrawn before the period.
• For the repayment of home loan amount only borrowed from particular entities like banks and housing finance companies.

Instances of no tax deduction on the maturity of the policy

No, there is no such thing as a limit on the number of deductions you can claim although, the deductions can be curtailed by certain other factors such as your income, corresponding level of expense, and other qualifying criteria.

Is life insurance really useful?

A basic life insurance policy is constructed to provide immediate liquid cash paid over a period of time to the family or the nominee of the insured after his/her death. It serves as major financial support as they are exempted from paying taxes for the amount acquired. Whereas, if the insured lacks dependent beneficiaries or a sustained income, it could be a waste of money.