It's terrifying to think about leaving your family members and dependents without any financial security. Life insurance policies exist to help your loved ones cope financially in the event of your unexpected death.
What most people do not know is how these life insurance policies are taxed. In order to leave a healthy amount of cash for your dependents, it is important to know about the tax benefits from life insurance policies.
Life Insurance Tax Benefits
Life insurance policyholders benefit from both Section 80C and Section 10(10D) tax deductions. Here are the details.
Tax Deductions Under Section 80C
Annually, any non-resident or resident individual can claim up to a limit of INR 1.50 lakhs tax deduction in life insurance premiums paid under Income Tax Act Section 80C. This exemption is offered in addition to other qualifying items such as This exemption is offered in addition to other qualifying items such as Public Provident Fund, National Savings Certificate, Equity-linked Savings Scheme, Fixed Deposits, house loan repayment, university fee paid, contribution to provident fund, and so on.
Typically, life insurance premium amounts up to a limit of 10% of the total guaranteed are eligible for a Section 80C deduction. The exemption is not possible for premiums paid in excess of 10%. Individuals designated as disabled or dealing with severe disease are excluded from paying up to a limit of 15% of the total assured sum, up to a maximum of INR 1.5 lakhs every year.
Tax Deductions Under Section 10 (10D)
The Income Tax Act Section 10 (10D) determines whether the maturity profits of a life insurance plan are tax-free or not. This Section 10(10D) applies to any sum paid through the insurance policy, regardless of whether the sum is a death payout, plan maturity benefit, or any other bonus or benefit.
It is critical to note that the death benefits payouts are typically tax-free. The maturity benefit payments (payable upon the insured's survival for a set amount of time) are occasionally taxed according to the amount of premium contributed. As per Section 10 (10D) of the Income Tax Act, for life insurance policies purchased after the date of April 1st, 2012, if the yearly premium paid exceeds 10% of the insurance policy's amount assured, the maturity profits (survival rewards) will be taxed based on your current income tax bracket. If the yearly amount does not exceed 10% of the insurance policy's amount assured, the profits are tax-free. To avoid taxes, the premium amount of life insurance plans issued between April 1st of 2003, and March 31st, 2012, must be less than a limit of 20% of the overall assured value for individuals that satisfy the following requirements:
- Impaired or seriously disabled individuals as defined in Income Tax Act Section 80U.
- People suffering from illnesses listed in Income Tax Act Section 80DDB.
- For plans purchased before April 1st of 2013, maturity rewards are not taxed provided premiums do not surpass 15% of the total guaranteed sum.
Points to Note:
- Tax breaks are permitted for life insurance claim payments like death benefits or maturity benefits, comprising accumulated bonuses, under Income Tax Act Section 10(10D). .
- Section 10(10D) tax breaks apply to all forms of available life insurance claim settlements.
- The tax advantages provided under Income Tax Act Section 10(10D) have no maximum limit.
- Tax deductions apply to both international and Indian life insurance providers.
How Unit-linked Insurance Policies are Taxed?
Unit-linked insurance policy premiums were generally exempt under Income Tax Act Section 80C, and maturity payments were likewise exempt under Income Tax Act Section 10 (10D). Nevertheless, a new policy for Unit-linked insurance policies was adopted in 2021, which pertains to ULIPs acquired on or after the date 1st February 2021. This rule is fairly straightforward.
If the yearly premium paid for the Unit-linked insurance policy exceeds INR 2.5 lakhs, zero tax exemption is available on the returns. Such taxable returns are considered capital gains.
Life insurance policies can be very useful for your dependents, but keep in mind that those policies have lots of tax benefits as well. If you are facing a costlier insurance policy, look into the many tax advantages before complaining about the higher cost. Those amounts will come back to you as a life insurance tax deduction, which is very much relevant for every taxpayer.