Life insurance and income tax laws
Indian income tax laws provide certain tax advantages with respect to premiums paid on life insurance policies as well as money received from insurance companies under such insurance policies. Let’s discuss these provisions.
Tax benefit for premiums paid for life insurance contracts
In accordance with Section 80C of the Income Tax Act, an individual and undivided Hindu family (HUF) have the right to claim a deduction up to Rs. 1.50 lakh on the premium paid to purchase and maintain an active life insurance policy, as well as other qualifying items. To claim this deduction, life insurance does not need to be purchased from an Indian insurance company, so even non-resident Indians or foreign nationals who have taxable income in India can claim this deduction even for a policy purchased outside India.
This deduction is available for all types of life insurance policies, ranging from pure insurance product like term plans to insurance and investment products like Unit Linked Insurance Plan (ULIP). This deduction is available with respect to premiums paid for life insurance policies on the life of the appraised, spouse or any child even if he is financially independent. Please note that no benefits are available for premiums paid for parental life insurance policies even if they are financially dependent on you. A HUF may claim a deduction for premiums paid for policies written on the life of any HUF member.
The amount of the deduction available for the premium is limited to 10% of the sum insured and any amount paid above 10% is to be ignored for policies issued from 01-04-2012, with the exception of life insurance policies on the life of individuals. disabled person where a higher percentage of 15% is allowed. For policies issued before April 1, 2012, a higher deduction of 20% is available.
Life insurance policies for which a tax benefit has been requested must be kept active for a minimum period of two years, failing which the deductions authorized in previous years are canceled and are to be reinstated in the income for the year at during which the policy lapses.
The premium paid for the purchase of an annuity plan, whether immediate or deferred, also benefits from tax advantages up to the overall limit of 80 C of Rs. 1.50 lakh.
Tax treatment of amounts received from an insurance company
Under Section 10 (10D) of the Income Tax Act, any money received from a life insurance company is exempt from tax provided that the premium paid for the one of the years of premium payment does not exceed 10% of the sum insured for policies issued after April 1, 2012. For people with disabilities, a higher percentage of 15% is to be considered to determine if the money is free tax or not.
In the event that the policy was issued between April 1, 2003 and March 31, 2012, the money would be in your hands tax-free if the premium paid in a year did not exceed 20% of the sum insured. Amounts received under policies issued before April 1, 2003 are fully exempt regardless of the amount of premium paid. These exemptions apply to all life insurance policies except Keymen insurance policies and ULIP policies issued after February 1, 2021. Any money received on the death of a person is fully exempt from payment. tax in the hands of the beneficiary, with the exception of the amount payable under Keymen insurance policies.
In case the insurance money received is taxable and the amount payable exceeds one rupee lakh, the insurance company will deduct withholding tax @ 5% of the difference between the premiums paid and the money to pay.
However, your liability for tax on such money received would depend on the applicable slab rate. Although there is no provision in the tax laws regarding the part of the insurance money received that would be taxable in your hands, but in my opinion only the difference between the money received and the premiums paid should only be taxed because the tax deduction provisions also speak of the income component of the money paid. Whether the difference is taxed under âIncome from other sourcesâ or under âCapital gainsâ is debatable, but in my opinion premiums paid can be treated as investments and be taxed as capital gains. long-term or short-term capital gains depending on the life of the contract and the time lag between the date of premium payment and receipt of insurance money with indexation of the service.
Money received under ULIP policies issued after February 1, 2021, where the equity component has always been greater than 65% in the fund, would be treated as listed equity / equity based programs and taxed under the section 112A at a fixed rate of 10% over and above the initial exemption of one lakh rupees for long-term capital gains earned as well as long-term capital gains on share programs and listed shares taken together.
The cash value of the annuity policies would be fully taxed if the deduction were used under Section 80 CCC, otherwise only the difference could be taxed in your hands.
I’m sure the above discussion will help you understand the nuances of tax laws for life insurance policies.
(The author is a tax and investment expert and can be reached on [email protected] and @jainbalwant on Twitter.)
Balwant Jain is a guest contributor. The opinions expressed are personal.