Does your Insurance Policy really give you the expected Tax Benefits

Does your Insurance Policy really give you the expected Tax Benefits

 

There is general perception of taxpayers that all premiums paid for Life Insurance is eligible for deduction under 80C subject to overall Limit of Rs. 1, 00,00.00. Further they also think that all sums received from Insurance Company against Life insurance Policy is exempted under section 10(10D).But this is not 100% correct .80C deduction as well as 10(10D) exemption is available subject to some conditions.  Also, the main attraction of any insurance product is tax benefits at entry under Section 80 C and at exit under Section 10 (10) D. Investors plunge in with their hard earned money just to reduce their tax burden and with an intention to build tax-free corpus at the end of the policy. But you need to be aware of the rules before you go by what your agent or advisor or a friend tells you as tax-free.

Insurance products give you deduction of up to Rs1,00,000 from taxable income under 80 C, subject to the life cover being at least five times the premium. If it is less than the minimum, the amount that can be claimed under Section 80 C for tax savings reduces appropriately. For example, if you take a single premium insurance policy with life cover of 1.25 times, then the amount claimed under 80 C will be only Rs 25,000 for Rs 100,000 premium paid.

 

Deduction allowable from Income for payment of Life Insurance Premium (Sec. 80C).

1.      Life Insurance premium paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in the case of HUF, premium paid on the life of any member thereof, Provided premium paid is not in excess of 20% of capital sum assured( Rule applicable on Policies taken after 01.04.2003).

2.     Contribution to deferred annuity Plans in order to effect or to keep in force a contract for deferred annuity, on his own life or the life of his spouse or any child of such individual, provided such contract does not contain a provision to exercise an option by the insured to receive a cash payment in lieu of the payment of annuity is eligible for deduction.

3.     Contribution to Pension/Annuity Plans - New Jeevan Dhara-I.

So as per (1) above premium paid up to 20% of the sum assured is available for deduction. Further Sum Assured does not include value of any premiums agreed to be returned, or of any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.

 

Tax Exemption on maturity amount of Life Insurance Policy under Section 10(10D)

 

The tax benefit for life insurance plans also extends to the time of maturity and in case death claim under Section 10 (10) D. However, the maturity benefit is tax-free only if the premium paid per year is lesser or equal to 20% of the life insurance cover. In other words, the life cover has to be at least five times the premium. The maximum sum assured (SA) for most single premium insurance products is only five times the single premium. You will have to ensure that the SA is five times the premium before you buy the product for tax benefits.

 

1)       Under the provisions of section 10(10D) of the Income-tax Act, 1961, Maturity/Death claims proceeds of life insurance policy, including the sum allocated by way of bonus on such policy is exempted from income-tax. However any sum (not including the premium paid by the assessee) received under an insurance policy issued on or after the 1st day of April, 2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the actual capital sum assured will no longer be exempted under this section.

3)      Further maturity amount received in Key Man Insurance Policy and amount to be refunded under Section 80DD Insurance Plan in case of handicapped dependent predeceases the individual ,is also not exempted under this section.

 

4)      This section 10(10D) is more strict than 80C provisions .As per 10(10D) ,exemption is not available if premium payable is more than 20% for any of the years during the term of the Policy ,However section 80C restrict benefit only up to 20% of the sum assured .So as per section 80C ,sum assured should be more than 5 times in the year of premium payment .

 

5)      From taking clue of the 80C, Life Insurance corporation of India has launched a Single premium Insurance Policy in which First year (year of payment) the sum assured has been fixed 5 times of the premium paid and from second year onwards sum assured reduced to 2 times only .

 

6)      In brief for section 80C ,year of payment and sum assured is to be checked for 20% clause . However in case of 10(10D) this clause is applicable throughout the policy term.

 

7)      Moreover the wording used in section 10(10D) is related to policy design .The word used in the section is  "in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured"

 

Note: This article is just for general guidance, for more details please contact your tax consultant or a Chartered Accountant.  Errors and omission are expected