Income Tax Benefits of Paying Insurance Premium

Tax Advantages of Paying Insurance Premium
 

The government provides tax benefits on insurance premiums to make insurance more affordable and encourage individuals to opt to  insurance plans and take control of their financial security. Sections 80C and 80D of the Income Tax Act allow taxpayers to claim deductions for premiums paid for these insurance plans (under the Old Tax Regime).

Here are the tax deductions available, under different sections, on the premiums for life insurance plans.
 

Life Insurance - Tax Benefits¹
 

The premium you pay for a life insurance policy to protect yourself or your family is eligible for tax deductions under Section 80C (under old tax regime) and Section 10(10D). In addition to the premiums paid, tax exemptions are available on the maturity or death benefits of a life insurance policy. Let us understand the deductions under different sections.
 

Section 80C
 

Section 80C allows a maximum tax deduction of upto ₹ 1,50,000 (under old tax regime) in a financial year for all eligible investments, including life insurance premiums, NSC, PPF, fixed deposits, tuition fees, home loan repayment, ELSS, Provident fund contributions, etc. Here are some important points to note.

1. 2 years is the minimum holding period¹ for a life insurance policy to claim a deduction against the premium paid.
2. To claim a deduction under section 80C, the life insurance premium should not be more than 10% of the total sum assured for the policies issued after the given timelines of 1st April 2012 and 20% for the policies issued before the given timeline of 1st April 2012².
3. For policy issued after 1 April 2013,  an insured who is an individual with a disability² as per section 80U or who is an individual with a disease specified under section 80DDB, the life insurance premium should not be more than 15% of the sum assured.
4. For annuity or pension plans⁴, a deduction is allowed under section 80CCC, a part of section 80C, with a maximum total deduction of ₹1,50,000 allowed (under old tax regime) in a year combining both sections. NRIs are also eligible to claim a deduction for contributions to a pension plan.

Section 10(10D)
 

Section 10(10D) allows 100% tax exemption on any income, such as maturity or death benefit, from a life insurance policy under some terms and conditions.

1. If the life insurance premium is not more than 10% of the sum assured for policies issued after 1 April 2012 and not more than 20% for the policies issued before 1 April 2012. In that case, the maturity benefit is fully tax-exempt under section 10(10D)².
   The maturity benefit is taxable to the policyholder if the premium exceeds the specified limit.
2. In case of the insured's death, the death benefit is tax-free in the hands of the nominee, even if the premium exceeds the given percentage.
3. For traditional life insurance policies (other than Unit Linked Insurance Plans) issued on or after 1 April 2023², if the premium is more than ₹5,00,000 in a year, the income received from the plan is taxable except for the death benefit, which is tax-free in the nominee's hands.
4. For ULIPs purchased on or after 1st February 2021³, if the premium paid for a ULIP exceeds ₹2.5 lakhs in any year or the aggregate premium for multiple ULIPs exceeds ₹2.5 lakhs, the maturity amount (including bonus) will be taxable.
5. For maturity proceeds exceeding ₹1,00,000 on policies not covered under an exemption under Section 10 (10 D), the insurer deducts a TDS @ 5% before making the payment. You can claim a TDS refund when you file your income tax return subject to condition ².

Conclusion
 

To conclude, a taxpayer can claim deductions under sections 80C and 80D  (under the old tax regime) for insurance premiums. Understanding the provisions and conditions under these sections can help you minimise your tax liability and make investments for  tax benefits. If you are still not sure, it is best to consult a professional to help you achieve your financial goals.

FAQs

1. What are the tax benefits of insurance premiums?

Tax benefits are available as per the provisions of sections 80C (under the old tax regime) and 10(10D) for premiums paid for life insurance plans.

2. How much insurance premium is tax-free?

For life insurance plans, premiums are eligible for deductions upto ₹ 1,50,000 (under the old tax regime) in a financial year under section 80C.

3. Can I claim a deduction if the premium is paid in cash?

IRDAI has set a rule of a maximum cash deposit towards your insurance premium of ₹ 50,000⁶, beyond which you need to pay by cheque, demand draft, credit card or any other online mode. However, no restriction exists for claiming income tax benefits u/s 80C for cash payments. Hence, yes, you can claim Income Tax Benefit u/s 80C for life insurance premium payment in cash, upto the admissible limit.

4. Is the maturity process of a life insurance policy taxable?

The maturity proceeds of a life insurance policy are taxable in the hands of the nominee only if the premium paid is more than 10% of the sum assured. However, a death benefit is completely tax-exempt in the hands of the nominee, even if the premium is more than 10% of the sum assured.