What are endowment plans?
To better answer the question, “What is an endowment policy?”, let’s first get a better idea of life insurance plans. Buying a life insurance policy is a contract between the policyholder and the insurance provider. The policyholder is required to pay premiums: monthly, quarterly, half-yearly or yearly. On the other hand, the policy provider offers certain benefits against the premiums paid. While the range of benefits may differ based on the type of plan and insurer chosen, the death benefit remains common across the numerous types of life insurance plans.
So, what is an endowment policy? It is the type of insurance plan that offers lump sum amount on maturity or on death. If all due premiums under the policy are paid, the policyholder will receive the survival benefit as money back at maturity.
Based on the benefit offered, here are the type of endowment plans available today.
- Participating plans
These types of endowment plans come with an additional bonus component. If during the term of the policy, the insurer earns profits, it may declare a bonus for the policyholders of these plans. The bonus is accrued over a period of time and may be offered as a part of the maturity benefit depending on policy terms and conditions.
- Non-participating plans
If you seek assured* maturity benefits on your endowment plan, go for a non-participating plan. They do not have a bonus component, but you receive a pre-decided amount at the end of your term duration, i.e., plan maturity.
- Unit-linked endowment plans
As the name may suggest, these plans invest your money in a range of market-linked funds. Depending on what the insurance provider has to offer and your risk appetite, you may be able to choose the type of funds you want your money to be invested in. Just keep in mind that these plans come with a certain degree of risk, and hence, your maturity returns may vary depending on market conditions.
Besides maturity benefits, endowment policy tax benefits must also be considered when buying these policies. If you have opted for the old tax regime, you may be able to claim benefits for the premium paid under Section 80C of Income Tax Act, 1961, subject to provisions stated therein. The benefit received under the plan is tax free in the hands of the recipient subject to satisfaction of conditions as mentioned in Section 10(10D) of Income Tax Act, 1961.
What are the tax benefits of premium payments under Section 80C?
The premiums that you pay toward endowment plans are also eligible for deductions. You can claim this under Section 80C of the Income Tax Act of 1961, but only under the old regime.
- Limit: You can claim up to ₹1.5 lakh annually under Section 80C provided the premium does not exceed:
- 10% of the sum assured for policies issued after 1 April 2012
- 20% of the sum assured for policies issued before 1 April 2012
- Who can claim: This benefit is available to individuals and HUFs.
This deduction can help lower your total taxable income in a financial year, making the endowment plan tax benefit attractive for you.
Tax on Death Benefit Payouts
In addition to the deductions under Section 80C, endowment plans come with other exemptions too.
- The death benefit received by the nominee is exempt from taxes under Section 10(10D).
- This makes sure that your family receives the full payout without worrying about any tax deductions.
The benefit applies regardless of how much premium was paid, making the life cover under an endowment plan completely tax-free for the nominee.
Are endowment plan maturity proceeds tax-free under Section 10(10D)?
The maturity proceeds of an endowment plan are generally exempt under Section 10(10D) if the conditions of the Income Tax Act are met. This includes all survival benefits, any accrued bonuses, and final payouts. However, the exemption will not apply if the premium in any year exceeds 20% of the sum assured (for policies issued before 1 April 2012) or 10% (for policies issued after that date). Further, the exemption will also not apply if aggregate annual premium for endowment plans purchased on or after 1 April 2023 exceeds INR 5 lakhs.
This is one of the major benefits of an endowment plan, allowing you to enjoy tax-free returns at maturity subject to conditions.
How to Claim Tax Benefits on Endowment Plans?
Claiming tax benefits on your endowment plan is simple.
- Fill in the correct details in the ITR form: When you fill out your ITR, make sure to fill in our correct details, including the policy name and premium amount under the appropriate section.
- Choose the right tax regime: Deductions under Section 80C are applicable only under the old tax regime.
- Keep proof of premium payment: Like all financial documents, keeping proper receipts or bank statements is very important. They should show the premium deduction amounts clearly.
Following these steps will help you maximize the benefits of an endowment plan when you file your income tax return.
Which tax filing mistakes should you avoid with endowment policies?
When claiming tax benefits, avoid a few common errors. Being careful with these details ensures that you don’t lose out on your eligible endowment plan tax benefit.
- Claiming deductions under the new tax regime where Section 80C deductions are not permitted.
- Failing to reverse deductions previously claimed if you surrendered your policy prematurely.
- Entering incorrect policy numbers or premium amounts on your tax return.
- Omitting to include the taxable surrender value as income if your policy does not qualify for exemption under Section 10(10D).
- Not separately declaring any bonuses received that are taxable.
New Tax Regime vs Old – Are Endowment Plans Still Tax-Efficient?
| Feature | Old Tax Regime (with deductions) | New Tax Regime (no deductions) |
|---|
Deduction on premiums (80C)
| Yes, up to ₹1.5 lakh per year (if the conditions are met)
| No
|
Death benefit (10(10D))
| Exempt
| Exempt
|
Maturity proceeds (10(10D))
| Exempt (if conditions are met)
| Exempt (if conditions are met)
|
Best suited for
| Those who wish to claim multiple deductions (like 80C, 80D)
| Those who don’t need deductions
|
Should you get an endowment plan?
If you are looking for life insurance, endowment plans are one of the options you may consider. You may avail of survival benefits, maturity benefits, and tax benefits on these plans, alongside the death benefit. Remember that deduction may only be claimed under Section 80C of the Income Tax Act 1961, if the claimant has opted for the old tax regime. Such claims cannot be made under the new tax regime.
Remember to take a good look at all the features of the endowment plan you are considering and use an endowment plan premium calculator. This will help you get an idea of whether the plan is suitable for your pocket and will offer you the coverage you seek.
While tax benefits of endowment plans can be quite the pull, remember to consider the plan as a whole and see if it suits you. Also, once you buy the plan, update your nominee on what the plan has to offer.
FAQs
What is the 120% rule for endowment?
If the premium in any year exceeds 20% (or 10% for policies issued after 1 April 2012) of the sum assured, the maturity benefit will be taxable under Section 10(10D).
Can I claim tax benefits for single-premium endowment policy?
Yes, single-premium policies are also eligible for Section 80C deductions under the old tax regime, provided the premium amount doesn’t exceed the threshold percentage of the sum assured.
Are bonuses from endowment policies taxable?
Bonuses received as part of death or maturity benefits are exempt under Section 10(10D) if the policy qualifies for exemption.
Is the surrender value taxed if I discontinue after 3 years?
If the policy doesn’t meet Section 10(10D) conditions or is surrendered before the minimum holding period, the surrender value becomes taxable.
