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Section 80C: Tax Saving Life Insurance Premium Amount and Deduction

Section 80C: Tax Saving Life Insurance Premium Amount and Deduction

One of the most popular investment tools to get tax deduction under Section 80Cof the Income Tax Act, 1961 is the life insurance plan. The plan is a highly preferred investment option for taxpayers and has been in existence for many years.

It has become popular mainly because it provides life cover and the premium paid on the life insurance plans qualifies for a deduction under Section 80C of the Income Tax Act, 1961. Moreover, the full premium amount further qualifies as a deduction under the same section. Apart from the other investment options under this section, taxpayers may claim a deduction for the premium paid by them on the life insurance plan. Under this section, the deduction limit is up to an amount of INR 1.5 lakh.

If you are looking for investment options which will help you save tax, availing of a life insurance plans will be beneficial. There is a total limit of INR 1.5 lakh which may be deducted from the gross income of the taxpayer. While many are not aware about the different avenues of investment, they usually consider life insurance plan as the first choice. The policy carries minimum risk and is the preferred option among several individuals. Here, we have provided complete information about the investment and its deduction under Section 80C of the Income Tax Act, 1961.

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Policy title

For individuals, the policy should be taken in the name of the taxpayer or his spouse or children. In the case of a Hindu Undivided Family (HUF), the deduction is available in respect of the policy taken in the name of any members of the HUF. Apart from this, no deduction is available in respect of policy taken under the name of any other person.

Deduction limit

A deduction of INR 1.5 lakh is allowed under this section.

Deduction limit for insurance policies

As mentioned above, the section allows a total deduction of INR 1.5 lakh. There are various avenues of investment under this section and one of the most popular is the purchase of an insurance policy. There is a common perception that premium amounting to INR 1.5 lakh on any insurance product is fully allowed. However, this is not true. There is a restriction on the amount of eligible deduction with respect to the capital amount assured. Irrespective of the insurance premium that has been paid for the insurance policy, the total amount eligible for a deduction is fixed at 10% of the sum insured. For policies issued before 1st April 2012, the deduction is fixed at 20% of the sum insured.

In case an individual suffers from a disability or a disease and the policy was issued after 1st April 2013, then the deduction limit will be 15%.

Taxability of the premium allowed in previous year

If the life insurance policy is availed of before the minimum holding period, then the deduction which was allowed in the previous year will be deemed as an income in the previous year and no further deduction will be allowed in respect to the contribution and payment made towards the policy.

Type of life insurance policies

A life insurance policy taken from any insurer approved by the Insurance Regulatory and Development Authority of India (IRDAI) will be eligible for a deduction.

Premium

The life insurance premium paid will be allowed for a deduction in the financial year (FY) in which it has been paid. For example, for the FY 2017-18, the premium must be paid between 1st April 2017 to 31st March 2018 in order to be eligible for a deduction under Section 80C.

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Minimum lock-in period

In order to avail of the benefit of deduction, the policyholder will have to retain the same for a minimum period. In case the policyholder surrenders the policy or the plan is terminated by the insurance company before time, then the benefits of the premium paid will not be available to him. This means that he will not be eligible for any deductions claimed previously.

In the case of a single premium life insurance plan, the individual should hold it for two years from the date of commencement of the policy.

In the case of Unit-Linked Insurance Plans (ULIPs), it should be retained for a minimum of five years from the start of the policy and in the case of any other life insurance plan, it should be held for a minimum period of two years from the start of the policy.

Method of premium payment

In order to claim a benefit, the premium can be paid in any form, such as cash, cheque or account transfer.

Furthermore, it is important to note that insurance policies purchased from foreign insurers will have additional conditions that will vary from case to case.

Tax benefits under Section 80CCC

This section offers an exemption to taxpayers who, from their income, are paying an insurance premium towards an annuity plan that would provide pension in the later year.

Tax benefits under Section 80

Under this section, an amount of INR 25,000 is allowed to those individuals who have paid the amount towards a health insurance plan provided by the government for self or family on account of the health checkup of the policyholder or his family. An additional amount of INR 25,000 is allowed if the premium is paid towards the health checkup of parents whether dependent or not. For members above the age of 60 years, an amount of INR 30,000 maybe claimed as a deduction. For HUFs, the deduction is limited to INR 25,000 only if the amount has been paid for availing of the health insurance for one of the members of the HUF. In case the health checkup made is preventive in nature, then the deduction will go up by INR 5,000 and the total deduction will be INR 30,000. You must keep in mind that the means of payment is crucial. The method of payment could be in cash or any other form for preventive health checkup whereas for any other medical issue listed above, the payment should be made in any form other than cash.

Tax benefits under Section 10 (10D)

The death claims as well as maturity benefits which are received by a policyholder are eligible for a tax exemption under section 10(10)D. There are various clauses under this, such as:

  • The main insurance policy should not have been issued under the Section 80DD or as a keyman policy.
  • Furthermore, an amount of 20% of the total policy sum assured will be allowed as a deduction under the plan which is issued after 1st April 2013
  • An amount of 10% of the total policy sum will be eligible as a deduction for those policies which are issued after 1st April 2012
  • The plan should be intended for the protection of the life of an individual suffering with severe disability as mentioned in Section 80U or for those individuals suffering from an ailment listed in Section 80DDB of the Income Tax Act, 1961.

With thorough knowledge about the life insurance policies, taxpayers may plan their investment in advance and ensure that they are making the right decisions. Life insurance policies are considered as an essential investment tool. With better financial planning, it is possible to make the most of the investment avenues, enjoy tax benefits, and achieve long-term financial goals.

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