Life Insurance Tax Benefits: Frequently Asked Questions

Find out the life insurance income tax benefits you can avail of buying life insurance policy

#Income-Tax
0:57 min read

On this Page

 

Buying a life insurance policy is essential for you, especially if you are the only breadwinner for your family. Your spouse, parents and children dependent on you to ensure their financial security. 

In case something happens to you, your loved ones will not only have to deal with the emotional trauma but will also have to tackle financial hardships. With a life insurance policy, however, you can provide financial security to your family for the time ahead. At the same time, you can also avail sustainable life insurance tax benefits. 

What are the Life Insurance Tax Benefits?

The life insurance tax benefits mainly fall into two categories – deductions and exemptions. Let’s discuss each of these tax benefits of a life insurance policy in detail.

What are the Deductions Under Section 80C?

Life insurance policy Max Life Insurance

If you believe that you cannot avail of life insurance tax benefits issued by private insurers, it is not true. If you buy life insurance policy from an insurer that is approved by the Insurance Regulatory and Development Authority of India [1], you are eligible for the deduction under Section 80C.

Also Read: Role of IRDAI

Section 80C of the Income Tax Act 1961, encapsulates the income tax benefits of life insurance policy. Under this Section, the premium you pay for your life insurance policy is eligible for deductions under Section 80C. 

Alongside this, you can also buy a life insurance policy for your spouse or child and increase your life insurance tax benefits.

There are certain restrictions related to the income tax benefits of life insurance policy, imposed by the Ministry of Finance [2]. To get tax deduction under Section 80C, the premium of a life insurance policy should not be more than 10% of the life cover or sum assured if it has been issued after April 1, 2012. 

However, if your life insurance policy was issued before April 1, 2012, you can claim income tax benefit, provided if the premium payable is below 20% of the chosen life cover. 

Moreover, there is a separate clause for the life insurance policy that covers individuals with a disability or disease covered under Section 80U and Section 80DDB, respectively. For such cases, the circular says that you can claim life insurance tax benefits issued after April 1, 2013, if the premium payable is below 15% of the sum assured.

What are the Exemptions Under Section 10(10D)?

Similar to the tax deductions you avail on a life insurance policy, the exemptions are based on the date of issuance of the policy. The exemptions apply to the insurance payouts and are a crucial part of the life insurance tax benefits. 

You can also get the income tax benefits of life insurance policy that you bought after April 1, 2013, for a person with a disability or disease specified in Section 80U and Section 80DDB, respectively. The only condition is that its premium should be less than 15% of the sum assured, as per the circular.

Income tax benefits of life insurance Max Life Insurance

What are the Exemptions Under Section 10(10D)?

Similar to the tax deductions you avail on a life insurance policy, the exemptions are based on the date of issuance of the policy. The exemptions apply to the insurance payouts and are a crucial part of the life insurance tax benefits. 

You can also get the income tax benefits of life insurance policy that you bought after April 1, 2013, for a person with a disability or disease specified in Section 80U and Section 80DDB, respectively. The only condition is that its premium should be less than 15% of the sum assured, as per the circular.

Income tax benefits of life insurance Max Life Insurance

In all these cases, the money you or your nominee receive at the time when a life insurance policy matures or as a bonus is entirely exempt from income tax under Section 10(10D).

What are the Frequently Asked Questions About Life Insurance Tax Benefits?

Getting the right kind of life insurance policy can make a huge difference in your life. You may not know much about the benefits, particularly the life insurance tax benefits and others at first. Therefore, you need to conduct thorough research about various features [3] and the benefits of the life insurance policy before you purchase one.

To help you choose a life insurance policy that best fits your financial needs, here is a list of frequently asked questions that people ask before buying a life insurance policy:

1. Should I Only Consider Tax Benefits while Buying a Life Insurance Policy?

Although you can avail of the life insurance tax benefits, these benefits should not be the only reason behind the purchase. Instead, you must consider different aspects of the plan, including the tenure of the life insurance policy you choose, the premium payable, policy inclusions and exclusions, and implications of premium default.

Also Read: Reasons to Buy Life Insurance Policy

2. How Much Income Tax Can I Save with my Life Insurance Policy Premium?

The income tax benefit of a life insurance policy depends on different factors, including its type and the premium you pay for it. As per Section 80C, you can avail of a tax deduction for the life insurance premium, up to Rs. 1,50,000 in a year. 

3. Will I Get Life Insurance Tax Benefits When It Matures?

The life insurance tax benefits are not limited to the premium you pay during its tenure. As per Section 10(10D), the maturity benefits of a life insurance policy are tax-exempt, provided the premium you pay every year does not exceed 10% of the basic sum assured at any point in time during the tenure. 

4. What Will Happen If I Stop Paying Life Insurance Premiums?

The continuation of a life insurance policy is vital to get the income tax benefits. It means that you cannot skip paying the premiums during the selected policy tenure to save income tax. In case you stop paying the premium of your life insurance policy, your policy is liable for discontinuation, which means you cannot avail of the income tax benefits of life insurance any further and your life insurance benefits may be affected

You can ensure uninterrupted payment of life insurance policy premium by choosing a suitable payment mode. You can either pay the premium either in one go or throughout the policy tenure, on a monthly or annual basis. 

5. Should I Consider Tax Benefits to Choose the Sum Assured?

Ideally, you should select the sum assured of a life insurance policy based on your financial needs. The sum assured determines the premium you need to pay, which in turn makes you eligible to get the life insurance tax benefits. In other words, the higher the premium, the higher the tax deduction you can avail under the Income Tax Act. 

6. What Will Happen If I forget to Pay Life Insurance Policy Premium on Time?

If the premium of your life insurance policy is paid annually and it falls overdue, you get a grace period of up to 30 days (15 days if premium is paid every month). Paying the premium during this period will not risk any of the insurance benefits, including the income tax benefits of life insurance. However, if you fail to pay the premium beyond the grace period, your life insurance policy may become defunct, and you may lose out on the various benefits. 

7. What are the Tax Benefits of Buying Unit Linked Insurance Plan?

Unit Linked Insurance Plans or ULIPs are one of the most popular types of life insurance policy that offer long-term financial security along with tax benefits. For ULIPs, you get the income tax benefits of life insurance only if you continue paying the premium for at least five years. 

If you choose to discontinue the ULIP plan before five years, you are not entitled to claim the income tax deduction in the previous year. Also, the deduction you have already claimed in the preceding years will be considered as your income for the year you terminate the policy. 

Also Read: How to Save Tax with ULIPs?

Maximize Income Tax Benefits with the Right Life Insurance Plans

A life insurance policy not only safeguards your loved ones financially against unforeseen events but also gives tax benefits. Claiming the maximum life insurance tax benefits is both simple and hassle-free. All you need to do is to understand which types of life insurance policy qualifies for the tax benefits, the maximum amount you can save, when and how to claim benefits. 

Maximize Income Tax Benefits with the Right Life Insurance Plans

A life insurance policy not only safeguards your loved ones financially against unforeseen events but also gives tax benefits. Claiming the maximum life insurance tax benefits is both simple and hassle-free. All you need to do is to understand which types of life insurance policy qualifies for the tax benefits, the maximum amount you can save, when and how to claim benefits. 

To check how the life insurance premium varies as per chosen life cover and other factors, use our online life insurance premium calculator. You must make a prudent decision of buying a life insurance policy with adequate life cover, riders and features. 

Sources:

[1]https://www.irdai.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo101&mid=1.2

[2]https://www.incometaxindia.gov.in/communications/circular/circular_no_4_2020.pdf

[3] http://www.policyholder.gov.in/Faqlist.aspx?CategoryId=75

ARN:- MAY/Bg/06

Calculate Term Insurance Premium

Continue Reading

Continue Reading



#Tax-Saving

Financial Planning Tips

Read More




#Tax-Saving

Investment Options to Help Save Tax

Read More




#Tax-Saving

How Salaried Professionals Can Save Tax

Read More