A life insurance policy is a must-have, especially if your spouse and children rely on your salary to make ends meet. Even if your spouse works, it is a good idea to ensure your life – while this will not compensate for the emotional loss, it will ensure that your family is financially secure. In India, there are numerous life insurance firms that offer hundreds of products to suit a variety of needs and age groups. When choosing a plan, keep in mind the tax implications of having a life insurance policy.
The most recent update
The outcome of the Union Budget for 2021:
- Sections 206AB and 206CCA have been added to the code. If a taxpayer has TDS / TCS of more than Rs 50,000 in the previous two years but has not filed income tax returns, the TDS rate would be doubled or 5%, whichever is higher.
- A new section 194Q is implemented, which imposes a 0.1 percent TDS on purchases exceeding Rs. 50 lakh in a calendar year. Only those with a revenue of more than Rs.10 crores will be subject to deductions..
Deduction under Section 80C:
Section 80C of the Internal Revenue Code allows you to deduct insurance premiums paid to insure your own life, the life of your spouse, or the life of your child. The deduction under section 80C is allowed regardless of whether your child is dependent or independent, minor or major, married or single. This deduction is available to both individuals and HUFs under Section 80C.
Many taxpayers are unsure whether this deduction is solely available for life insurance coverage purchased via LIC. This isn’t correct. A Section 80C deduction is available for premiums paid to any insurer that has been approved by the Insurance Regulatory and Development Authority of India (IRDAI). However, if the policy was issued after April 1, 2012, the premium paid cannot exceed 10% of the total assured in order to claim a deduction under section 80C. To claim this discount for insurance issued before April 1, 2012, the premium paid must not exceed 20% of the sum guaranteed.
Furthermore, it is important to note that for a policy issued after April 1, 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB, the premium must not exceed 15% of the sum assured in order to claim the deduction under Section 80C. “Sum assured” simply refers to the sum guaranteed to the survivor under the policy. This figure excludes any premiums that have been agreed to be returned, as well as any incentive payments made under the policy.
Exemption under section 10(10D) on Maturity amount received
Any amount received on maturity of a life insurance policy or amount received as a bonus is fully exempt from Income Tax under Section 10 when the premium paid on the policy does not exceed 10% of the sum assured for policies issued after April 1, 2012, and 20% of the sum assured for policies issued before April 1, 2012. (10D). Policies taken after April 1, 2013, on the life of a person with a disability or sickness listed under Sections 80U and 80DDB, where the amount received at maturity is tax-free if the premium paid does not exceed 15% of the sum insured, are also included.
No exemption from income tax on the maturity of policies
Where the premium paid exceeds 10% of the total assured, there is a tax – Any money received from a life insurance policy whose premium is greater than 10% or 20% of the sum assured, depending on the case, is completely taxed.
Did you know?
Maturity proceeds from life insurance plans that aren’t exempt under section 10(10D) are taxable as “other sources of income.”
TDS on life insurance policy
Starting in October 2014, if the amount paid from a life insurance policy exceeds Rs 1,00,000 and the policy is not covered by an exemption under Section 10(10D), the insurer must withhold TDS of 1% before making the payment. TDS will be deducted on bonus payments as well. TDS would not be deducted if the amount received is less than Rs 1,00,000. However, the amount received will be fully taxable for you. In your income tax return, you can claim a credit for the TDS you paid. According to the Union Budget 2019, the TDS on insurance policy proceeds would be reduced to 5% on the amount of income included in the proceeds paid or payable upon maturity on or after September 1, 2019.
Tax liability of single premium insurance policies
Taxpayers may be unsure how to handle payouts from a single-premium insurance policy. Let’s use an example to better understand taxability. Consider Sandesh, who had purchased a policy with a maturity value of Rs 1,10,000 from an insurance firm. On September 16, 2013, he paid a single premium of Rs 45,000. 10% of the premium equals Rs 11,000 in this case. The Rs 45,000 premium is more than 10% of the sum assured.
As a result, the insurance maturity funds are taxable and do not qualify for section 10(10D) of the Income Tax Act exemption. On September 16, 2019, Sandesh surrendered the policy due to maturity. The insurance firm is required to deduct tax on the maturity proceeds because the maturity payment exceeds Rs 1 lakh. Before distributing the payment to the taxpayer, the insurance company is required to deduct tax equal to 5% of the payment’s income component.
TDS would be deducted on the net maturity proceeds, which in this case would be Rs 65,000. (1,10,000-45,000). On Rs 65,000, the TDS will be 5%, equal to Rs 3,250. Sandesh will be entitled to Rs 61,750 in net proceeds (65,000-3,250). Sandesh should declare the net maturity profits under ‘income from other sources on his income tax return. Sandesh can also claim a Rs 3,250 TDS credit against his tax liability calculated while filing his income tax return.