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Life insurance is not only beneficial to provide a financially secure future for your family but also helps to save money through income tax exemptions. Under section 80C of the Income Tax Act, 1961, the life insurance premiums that you pay during any financial year are exempted from your taxable income up to a maximum of INR 1.5 lakh.
Most individuals are aware of the benefits available under section 80C. However, tax benefits are also available under section 10(10D) of the Income Tax Act, 1961. Any income received from your life insurance policy is exempted from income tax under this section. This income tax deduction is available for all types of life insurance policy payouts, without any upper limit and including bonuses and surrender value too.
Under Section 10D of the Income Tax Act, 1961, an individual can avail tax exemption on the sum assured and accrued bonus (if any) received through their life insurance policy claim (maturity or death benefit). This exemption is also applicable for the returns earned from a ULIP.
One can avail the exemptions under Section 10D if the premiums paid in a single year during the policy term are not more than 20% of the sum assured for a policy purchased 1st April 2003 and 31st March 2012. However, if the policy is purchased after 1st April 2012, then the premium payment should not exceed 10% of the sum assured.
Furthermore, the exemption is also applicable if a life insurance policy is issued before 1st April 2013, and the insurance premium for any year during the policy term does not exceed 15% of the sum assured. This goes for a disabled or severely disabled person (under Section 80DDB) or individual suffering from an ailment (under Section 80U).
Since October 2014, if the amount you receive from the life insurance policy is higher than ₹ 1,00,000 on policies that don’t come under the exemption under Section 10(10D), then TDS at 1% will be deducted by the insurance company before making the payment. TDS is deducted on the bonus payments as well. If the amount received is lower than ₹ 1,00,000, then no TDS is deducted. While this amount received is fully taxable, one can claim credit for TDS deducted in Income Tax Return.
The maturity amount gained through a single premium insurance policy is taxable and not exempted under Section 10(10D) of the ITA. However, the single premium policy’s maturity benefit amount will be tax-free only if the minimum sum assured is ten times the single premium amount paid for the policy’s tenure.
1. Benefit must be death payout
2. The benefit received is not for a policy issued under section 80DD (3) of the Income Tax Act, 1961.
3. The payout received should not be available under Keyman Insurance Policy
4. It must not be an annuity or pension plan payout
5. Benefit is not received under an employer-sponsored group life insurance scheme
6. The insurance premium paid during any year must not exceed 20% of the sum assured for policies purchased between 1st April 2003 and 30thApril 2012
7. If the policy is purchased after 30thApril 2012, the premium amount should not be more than 10% of the sum assured
8. The insurance premium payable during any years should not exceed 15% of the sum assured for the policy. The same must be purchased on or after 1stApril 2013, and the insurance must be for the life of any person, who is:
a. An individual with a disability or severe disability as per the section 80U of the Income Tax Act, 1961
b. Having any disease or ailment as specified in the rules under section 80DDB of the Income Tax Act, 1961
If the maturity benefit of your policy is not exempt under section 10(10D), then the amount you receive is subject to tax deducted at source (TDS) as per the following rules
1. If Permanent Account Number (PAN) is submitted, then 2%TDS on total maturity amount
2. If PAN is not submitted, then 20% TDS is applicable on the total amount
Several people have purchased insurance as a tax planning tool for several years.Insurance companies often use the availability of tax benefits while promoting their policies. These benefits are offered as an incentive to enable more individuals to procure insurance coverage.
It is recommended you clearly understand the different tax benefits available under various sections of the Income Tax Act, 1961. However, you must be careful and not make your purchase decision solely on the basis of the available tax benefits.
It is advisable, you compare different life insurance plans offered by various insurers. You must understand the features, benefits, inclusions, and exclusions, and other terms and conditions before making your decision.Conducting extensive research online and using reliable sources to make the comparison will be beneficial. While choosing an insurance company, you need to consider the reputation and reliability of the insurer. It is important you opt for a company that offers superior customer service and higher claim settlement ratio to avoid complications in the future.
1. Points to Note about Section 10(10D) of the Income Tax Act, 1961
The points to be noted are:
- If the maturity benefit which you are eligible for under your insurance policy does not qualify for an exemption under the Section 10(10D) then the amount you receive from the policy will be subjected to TDS (tax deducted at source) under the following scenarios:
1. When an individual has not provided a PAN card, 20% TDS is applicable on maturity benefit.
2. When an individual has provided a PAN card, 2% TDS is applied on full maturity benefit.
2. Exceptions under Section 10(10D) of the Income Tax Act, 1961
Some of the exceptions under Section 10(10D) are:
- Amount obtained under Keyman Insurance Policy. - Any amount obtained from an insurance policy issued on 1st April 2003, and before 31st March 2012 where the premium amount for any years during the policy term exceeds twenty per cent of the actual sum assured.
- Any amount obtained under a policy issued after 1st April 2012 with the premium amount during the policy term exceeds ten per cent of the actual sum assured.
3. Terms and conditions for availing tax exemption under Section 10(10D)
- This section provides tax deductions on any sum obtained through the maturity, death benefit and bonus of an insurance plan.
- Premium paid during any year for a policy cannot be more than 20% of sum assured for life insurance bought between 1st April 2003 and 31st March 2012.
- Payout which is not eligible for tax deduction under Keyman Insurance Policy is eligible for deductions under this section.
- For policies bought after 1st April 2012, the premium payment cannot go beyond 10% of the sum assured.
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