Tax Benefits^* on Life Insurance Policy

This section is solely applicable for life insurance pension plans. If you buy a deferred annuity policy, i.e. a pension plan wherein annuity payments do not start immediately, you get a tax benefit on the premium amount.

Premium paid for such policies qualifies for a deduction under this section. The rules for claiming the deduction are the same as the rules for Section 80C. The maximum amount of deduction available is Rs.1.5 lakhs which includes the deduction available under Section 80C of the Act. 

For example, say you buy two life insurance plans. One is a Unit Linked Insurance Plan(ULIP) wherein you pay a premium of Rs.1 lakh, and another is a pension plan wherein you also pay a premium of Rs.1 lakh. In this case, the deduction would be as follows –

• Rs.1 lakh for ULIP premium under Section 80C
• Rs.1 lakh for pension plan premium under Section 80CCC

However, the maximum deduction allowed is Rs.1.5 lakhs. So, you could claim a deduction up to an amount of Rs.1.5 lakhs only. You can get a tax deduction of Rs.1 lakh under Section 80C and Rs.50,000 under Section 80CCC. Alternatively, you can get a tax deduction of Rs.50,000 under Section 80C and Rs.1 lakh under Section 80CCC.

This section does not allow any deduction. It simply states that the deduction available under Section 80C, 80CCC and 80CCD(1) of the Act cannot exceed Rs.1.5 lakhs. 

Deduction under Section 80D of the Act is allowed for premiums paid towards health insurance policies. So, the deduction is available in the following instances –

• If you buy a health insurance policy from a life insurance company
• If you choose a rider with your base policy that provides health insurance coverage. Common examples of the rider include critical illness rider, surgical rider, terminal illness rider, etc.

You can also pay the premium for your family and claim a deduction under this section. The limit of deduction is as follows –

• For people less than 60 years of age, it is up to an amount of Rs.25,000 per financial year.
• For people more than or equal to 60 years of age, the limit is up to an amount of Rs 50,000 per financial year.

Moreover, in case you are paying the health insurance premium for your dependent parents as well, you can get an additional amount of tax deduction under section 80D of the Act for the premium paid. Even for this deduction, the limit would be as follows:

• If both of your parents happen to be less than 60 years of age, you get a tax deduction upto an amount of Rs 25,000 for premium payment for their health insurance policy.
• However, if one or both of them are 60 years or more, then you get a tax deduction up to an amount of Rs 50,000 for premium payment for their health insurance policy.
• Below is the summary of deductions available under Section 80D:

Deduction under Section 80DD is available if you have a dependent who is differently abled and is financially dependent on you completely. If you buy a life insurance policy for such a dependent, the premium that you pay for the same can be claimed as a tax deduction under this section.

The conditions to avail of the deduction are as follows –

• The deduction is available to an individual or a Hindu Undivided Family (HUF)
• You should not have claimed a deduction under the Section 80U of the Act
• The dependent can be your spouse, children or siblings
• The disability should be 40% and above
• The disability should be defined under Section 2(i) of the Persons of Disabilities Act, 1995

A flat deduction of Rs.75,000 is allowed if the disability is between 40% and 80% and Rs.1.25 lakhs if the disability is more than 80%.

Benefits that you receive from a life insurance plan, including bonus is exempt from tax. Any amount that you receive would be eligible for exemption provided the following conditions are met –

• In case the policy has been issued on or after 1st April 2012, the premium should not be greater than 10% of the death sum assured. However, in case the plan is issued before this date, the premium can be greater than 10% of the death sum assured but it should be within 20% of the death sum assured.
• If the life insured has a disability as specified u/s 80U of the Act or suffers from a disease specified under the Section 80DDB the Act, and the plan is issued on or after 1st April 2013, premiums up to 15% of the death sum assured are allowed as a deduction.

• In the case of ULIPs bought on or after 1st February 202110, the total maturity benefit will be tax-free if the aggregate annual premium is up to an amount of Rs.2.5 lakhs. If the premium exceeds Rs.2.5 lakhs, the gain from such policy will be taxable as capital gain. The tax would be applicable depending on the type of fund you invest in. It would be as follows –

• In the case of equity investment, returns up to an amount of Rs.1 lakh would be tax-free. If the returns exceed Rs.1 lakh, the excess would be taxed at 10%. This is applicable if you hold your investment for at least one year.
• If however, you redeem within the first year, the tax rate would be 15% on the total returns earned from the policy. This would be considered as a short-term capital gain
• In the case of debt investment, returns would be taxed at 20% if you hold the investment for 3 years. For durations shorter than 3 years, the returns would be added to your taxable income and taxed as per applicable income tax slab rates. No indexation benefit would be allowed on such returns, and they would be called short-term capital gains.
• A Securities Transaction Tax (STT) of 0.001% would also be applicable if you have invested in equity funds in your ULIP plan
• If you pay a top-up premium, the aggregate premium calculated for the taxation of maturity proceeds would include the top-up premium paid. If the top-up premium and the basic premium exceed Rs.2.5 lakhs in any of the year of policy, the gain from such policy will be taxable as capital gain

However, the taxation of policies wherein the annual premium exceeds Rs.2.5 lakhs is applicable only on policies issued on or after 1st February 2021. If you have bought the policy before this date, the maturity benefit would be exempted even if the premium is more than Rs.2.5 lakhs provided policy is satisfying the criteria mentioned in Section 10(10D) of the Act.