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Single Premium Life Insurance Tax Benefits

A single premium life insurance policy is a type of life insurance plan wherein the policyholder pays the premium as a lump sum at the time of policy purchase instead of regular instalments over the policy’s tenure.

Investment plans also act as tax-planning tools, as many avenues help reduce tax liability. There are different types of investment plans, and by choosing the right one, you can invest according to your needs and grow your savings.Read Less

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Written ByPalak Bagadia
AboutPalak Bagadia
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Palak Bagadia, Associate – Digital Marketing at Bajaj Allianz Life, with experience spanning content and performance marketing, recruitment, employee engagement in the BFSI industry.
Reviewed ByRituraj Singh
AboutRituraj Singh
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Rituraj Singh,With over 6.5 years of experience in the insurance industry, Rituraj Singh, Manager- Product & Brand Marketing at Bajaj Allianz Life Insurance overlooks new product launches, compliance, and brand projects, leveraging artificial intelligence and technology to enhance outcomes.
Written on: 7th July 2024
Modified on: 7th July 2024
Reading Time: 15 Mins
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A single premium life insurance policy may be more convenient than a regular policy for some, since it takes away the need to pay premiums repeatedly. One may enjoy the same sense of financial security from their single premium life insurance plan without having to pay the premiums in instalments. Moreover, one may also be able to claim deductions under Section 80C among other benefits the Income Tax Act of 1961 (the Act), during the financial year in which the premiums are paid subject to satisfaction of terms and conditions mentioned therein.[1][2]

However, since one pays the premium in a lump sum at once in a single premium plan, some may wonder how that aspect affects the plan’s taxability. Let’s learn about the same in detail.

 

How Does a Single Premium Life Insurance Policy Work?

 

To understand the tax benefits of single premium life insurance plans, let’s first comprehend how these plans work.

Usually, when you buy a regular life insurance plan, the premium may be set at a particular amount that you may have to pay at regular intervals. In many cases, you may have to pay the premium for the entire policy tenure.

However, with a single premium life plan, the premium is calculated such that it has to be paid only once, that is during the purchase of the policy. Once you have made the single premium payment, you may not have to make any more financial contributions toward the plan for the rest of the tenure. For this reason, the one-time premium of such plans may be high.

A single premium life insurance plan may be advantageous because one may not have to worry about the policy lapsing due to the non-payment of the due premium instalments.

 

Tax Benefits of a Single Premium Life Insurance Policy

 

Now, let’s look at the tax benefits of a single premium life insurance policy that you may enjoy under the existing tax laws.

 

• Deduction under Section 80C of the Income Tax Act, 1961 [1][2][3]

 

As per Section 80C of the Act, the premiums of a life insurance policy may be used to claim deductions of up to Rs 1.5 lakhs.

If you are wondering whether this deduction is applicable for single premium life insurance plans, then the answer is yes. A policyholder paying a lump sum premium for their single premium plan may also use this benefit as mentioned under Section 80C of the Act. This tax deduction limit is clubbed with other tax-saving deductions mentioned under the Section.

However, there is one major distinguishing factor between the benefits under section 80C for a single premium life insurance plan and for a life insurance plan with regular payment term. While the latter may be used to claim deductions every financial year of the policy tenure, a single premium plan may be used to claim Section 80C tax deductions only for one financial year during which the payment has been made. These deductions are available subject to terms and conditions of the Act.

 

Terms and conditions on Section 80C tax deduction

 

To claim deduction under Section 80C for a single premium life insurance policy, the premium of the plan have to be within or equal to 10% of the sum assured. This is applicable only for policies bought after 1st April 2012. For the policies bought before 1st April 2012, the deduction towards premium paid was allowed up to 20% of the sum assured.

 

Tax Implications on the Surrender of a Single Premium Policy[2] [3]

 

For the uninitiated, surrendering a policy can refer to the process of voluntarily terminating the policy before it has matured. Whether the policyholder receives the benefits of the policy on its surrender depends on the terms and conditions laid down in the policy and the time the surrender takes place.

If the surrender takes place before the end of the two years, then deduction under Section 80C claimed on the life insurance premium previously will be revoked. The deductions previously claimed will be considered as the income of the policyholder and taxed accordingly.

 

Important Points to Remember about Single Premium Policies

 

If you may be planning to buy a single premium life insurance policy, then do keep these points in mind:

  • Since the premium of single premium policies tends to be higher as compared to yearly premiums, the chances of it exceeding the 10% limit under Section 80C and Section 10 (10D) may also be higher. And hence any gain from Single premium policy is taxable in the hands of recipient. Death benefit received under Single premium policy is also tax free in the hands of recipient.
  • The benefits under Section 80C are allowed if the old tax regime is opted and are not allowed under the new tax regime.[4]

 

Conclusion

 

In conclusion, a single premium life insurance policy may be a suitable alternative to regular term plans, if you prefer paying a single premium rather than paying premiums in regular intervals. The tax benefits of a single premium life insurance policy may be similar to that of a regular policy and may be subject to the same terms and conditions. The tax implications of the surrender of a single premium policy, however, may be different.

Hence, one may review their tax priorities, budget, and other factors and opt for a single premium policy as they may see fit. Reaching out to a tax expert or financial consultant may also help.

Ref:

1. https://cleartax.in/s/life-insurance-taxability

2. https://www.axisbank.com/progress-with-us/money-matters/insure/know-about-single-premium-life-insurance-policy

3. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx

4.https://cleartax.in/s/section-115bac-features-new-tax-regime-benefits#:~:text=and%20new%20regimes.-,Exemptions%20and%20deductions%20not%20claimable%20under%20the%20new%20tax%20regime,-The%20following%20are

BJAZ-WEB-EC-02467/23

Disclaimers:
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##Our policy covers COVID 19 claims subject to policy terms and conditions being met

3Discount is available for regular premium and limited premium payment frequency under all variants of this product.

2Above illustration is considering Male aged 25 years | Non-Smoker | Life Cover Variant | Policy term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | medical rates | Annual Premium Payment Mode | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only.

Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility.

*Individual Claims Settlement Ratio for FY 2021-2022

The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.

The views stated in this article is not to be construed as investment advice and readers are suggested to seek independent financial advice before making any investment decisions. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com) carefully before concluding a sale.

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*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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%%Above illustration is for Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V03) considering Male aged 25 years | Non-Smoker | Policy Term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | Standard Life | 1st Year Premium is Rs. 6,238. 2nd Year onwards premium is Rs. 6,659. Total Premium Paid is Rs. 1,99,349 | Medical Rates | Yearly Premium Payment Mode | Death benefit opted is lumpsum payout and monthly installments (Lumpsum Payout Percentage : 45, Income Payout Percentage : 55) | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only. This is inclusive of all the discounts mentioned above.

##Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

@Term Insurance plan bought online directly from Bajaj Allianz Life Insurance has no commissions involved.

^^The Return of Premium amount is total of all the premiums received, exclusive of extra premium, rider premium and GST & /any other applicable tax levied, subject to changes in tax laws
Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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