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Life Insurance Tax Benefits

17 February 2025

10 mins read

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Ever thought about how you can secure your family's future and also enjoy some financial perks along the way? Life insurance is not just about providing for your loved ones in your absence; it's also packed with potential tax benefits* that can make a big difference in your financial planning. But what exactly are these benefits, and how can you make the most of them? Let's break it down in a straightforward way, ensuring you get the full picture of how life insurance can be a savvy addition to your financial toolkit.

What Are The Tax Benefits* Of Life Insurance Policy?

To make it easier to understand, let's look at the tax benefits* of life insurance policies in a table format:

Benefit	Description	Section under Income Tax Act, 1961
Premiums Paid	Premiums paid for life insurance policies are deductible from your taxable income.	Section 80C
Maturity Benefits	The amount received upon maturity or surrender of the policy is tax-free, provided certain conditions are met.	Section 10(10D)1
Death Benefit	The sum received by the nominees on the policyholder's death is entirely tax-free.	Section 10(10D)1

How to Save Income Tax with Life Insurance Plans?

Life insurance plans offer a dual advantage – they not only provide financial security to your family but also offer attractive tax-saving opportunities. Here’s how you can save income tax with life insurance:

Stage 1: Advantage at Entry

Enjoy tax deductions on your premium payments under various sections: Section 80C for life insurance, Section 80CCC for pension, and Section 80D for health insurance.

Stage 2: Advantage in Earnings

Your investment has the potential to grow, and the earnings are currently not taxable.

Stage 3: Advantage in Flexibility

You have the flexibility to switch between equity, debt, and balanced funds at any time without incurring any tax liability.

Stage 4: Advantage at Exit

The maturity proceeds from your policy are exempt from tax, subject to conditions specified under Section 10(10D)1 of the Income Tax Act, 1961.

By strategically planning and choosing the right life insurance policy, you can significantly reduce your tax liability while ensuring your family’s financial security. Remember, the key to maximising these benefits is to stay informed and make choices that align with your overall financial planning goals.

What Are The Tax Benefits* on Riders of Life Insurance?

Riders are additional benefits that can be attached to a basic life insurance policy, offering extra protection against specific risks like critical illness, accidental death, or disability. These riders enhance your insurance coverage but come at an additional premium. The good news is that the premiums paid for these riders also come with tax benefits*, making them a financially wise choice. Here's a breakdown:

Critical Illness Rider: The premium paid for a critical illness rider qualifies for a tax deduction under Section 80D, which is specifically for health-related premiums.
Accidental Death and Disability Rider: Premiums for accidental death or disability riders can be claimed under Section 80C, just like your life insurance premium.

These tax benefits* make riders not only a valuable addition to your insurance coverage but also a smart tax-saving tool. Remember, the overall limit for deductions under Sections 80C and 80D applies, so planning your investments and insurance wisely is key to maximising your benefits.

What Is TDS On Life Insurance Policy?

Tax Deducted at Source (TDS) on a life insurance policy applies to the payouts that exceed the exemption limit under Section 10(10D)1 of the Income Tax Act. Here's how it works:

TDS Rate: If the amount received from a life insurance policy exceeds the sum assured (not including any premium paid for the year), a 5% TDS is applicable on the income portion of the payout.
Exemption Conditions: No TDS is deducted if the total amount is less than ₹1 lakh. Furthermore, death benefits are entirely exempt from TDS, regardless of the amount.

Understanding TDS on life insurance is crucial for policyholders, as it affects the net amount received from the policy. It’s important to keep track of these deductions and claim any excess TDS deducted at the time of filing your income tax returns.

What Is GST On Life Insurance Policy?

Goods and Services Tax (GST) is applicable on the premiums paid for life insurance policies. The rate of GST depends on the type of insurance product:

Term Insurance: 18% GST is applicable on the premium.
ULIPs: 18% GST applies to the premium.
Traditional Endowment Plans: Here, GST is charged at a differentiated rate. A 4.5% GST is charged for the first year’s premium and 2.25% for subsequent premiums.

GST impacts the overall cost of the insurance policy but is considered in light of the comprehensive financial protection these policies offer. Policyholders need to factor in the GST when calculating their insurance costs and tax savings.

Eligibility Criteria to Claim Life Insurance Tax Benefits*

To make the most of life insurance tax benefits*, it's essential to meet certain eligibility criteria. These criteria ensure that policyholders comply with the Income Tax Act 1961, thereby making them eligible for the tax benefits* associated with life insurance policies. Here’s what you need to know:

Policy Issued Date: Policies issued after April 1, 2012, must have a premium that does not exceed 10% of the sum assured to be eligible for tax benefits* under Section 10(10D)1. For policies issued before this date, the premium should not exceed 20% of the sum assured.
Type of Policyholder: The tax benefits* can be claimed by the individual who is the policyholder. This includes life insurance policies taken for self, spouse, or children.
Validity of the Policy: The policy must be active and in good standing. Tax benefits* cannot be claimed on lapsed or surrendered policies.
Premium Payments: Premiums paid for the policy are eligible for deduction under Section 80C, up to the limit of ₹1.5 lakh annually. However, to avail of the benefits under Section 10(10D)1, the premiums paid should not exceed the specified percentage of the sum assured.
Type of Life Insurance Policy: Almost all types of life insurance policies qualify for tax benefits*, including term insurance, ULIPs, and traditional endowment plans, provided they meet the other eligibility criteria.

Understanding these criteria is crucial for effectively planning your taxes and ensuring that you comply with the regulations to make the most of the available tax benefits*.

Conclusion

Life insurance is a powerful tool not just for providing financial security to your loved ones but also for managing your taxes efficiently. With benefits ranging from deductions on premiums paid to tax-free payouts, it offers a compelling proposition for savvy financial planners. By understanding the eligibility criteria, you can ensure that you're fully leveraging the tax advantages* offered by your life insurance policy. Remember, a well-thought-out life insurance plan can serve as a cornerstone in your financial portfolio, offering peace of mind and tax savings. As always, it's wise to consult with a financial advisor to tailor your insurance purchases to your specific financial situation, ensuring you maximise benefits while securing your family's future.

By understanding these aspects—riders, TDS, and GST—policyholders can better understand the basics of life insurance, ensuring they're fully informed about the tax implications and benefits of their policies.

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FAQs - Life Insurance Tax Benefits

How much should I invest to save tax?

The amount you should invest to save tax depends on the maximum limit allowed under various sections of the Income Tax Act, primarily Section 80C, which has a limit of ₹1.5 lakh per annum. However, it's important to consider your financial goals, risk appetite, and investment horizon rather than just focusing on tax saving. Ideally, your investment should be a part of your overall financial planning. Beyond Section 80C, you can also explore investments in NPS (National Pension System) under Section 80CCD(1B), which offers an additional deduction of up to ₹50,000.

Is ULIP a good tax-saving investment?

Unit Linked Insurance Plans (ULIPs) can be a good tax-saving investment for individuals looking for a combination of life insurance and market-linked returns. They offer the dual benefit of tax saving under Section 80C and tax-free maturity under Section 10(10D)1, provided the premium does not exceed 10% of the sum assured. However, ULIPs should be chosen based on your risk tolerance, investment horizon, and financial goals, as they are market-linked and come with a lock-in period of 5 years.

How to plan your tax-saving investments for the year?

Planning your tax-saving investments should start at the beginning of the financial year to spread your investments throughout the year, avoid last-minute decisions, and capitalise on compounding interest. Here's a step-by-step approach:

a. Assess Your Taxable Income: Calculate your gross taxable income to understand your tax bracket and how much tax you need to save.

b. Utilise Section 80C: Invest in instruments under Section 80C up to ₹1.5 lakh. Choose based on your financial goals, risk profile, and liquidity needs.

c. Explore Beyond 80C: Look into other sections like 80CCD(1B) for NPS, and 80D for health insurance, which offer additional tax-saving opportunities.

d. Diversify: Diversify your portfolio across different instruments to balance risk and return.

e. Monitor and Adjust: Regularly review your investments and make adjustments to align with any changes in your income, goals, or tax laws.

How many tax-free instruments can one have?

There's no limit to the number of tax-free instruments one can hold. However, the amount of deduction or exemption is capped under various sections of the Income Tax Act. It's important to diversify and choose tax-saving instruments that align with your financial goals, risk appetite, and investment horizon, such as PPF, ELSS, NPS, and tax-saving FDs, among others.

How can I claim TDS credit in my Income Tax Return?

To claim TDS credit in your Income Tax Return (ITR), follow these steps:

a. Collect TDS Certificates: Ensure you have all your TDS certificates, such as Form 16 (for salary) and Form 16A (for other incomes).

b. Verify with Form 26AS: Form 26AS is a consolidated tax statement available on the Income Tax e-filing website. It shows all TDS deducted from your income. Verify that the TDS details in your certificates match the entries in Form 26AS.

c. File Your ITR: While filing your ITR, enter the TDS details in the appropriate sections. The TDS amount will be adjusted against your total tax liability.

d. Claim Refund: If the TDS deducted exceeds your tax liability, you can claim a refund of the excess amount.

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