For those with dependent family members, purchasing a life insurance policy is critical. The policy will help you safeguard your parents’, spouse’s, and children’s financial futures. Insurance firms in India provide a wide range of options when it comes to obtaining an appropriate life insurance policy. Make careful to understand the life insurance tax effects before purchasing an appropriate life plan so that you can arrange your budget correctly. Here are some of the most significant taxability situations to remember.
Section 80C of the Income Tax Act allows you to deduct insurance premiums paid to cover your own life, the life of your spouse, or the life of your child. The deduction under section 80C is permitted regardless of whether your child is dependent or independent, minor or major, married or single. This deduction is available for both individuals and HUFs under Section 80C. Many taxpayers are unsure if this deduction is solely available for life insurance coverage purchased via LIC. This isn’t correct. A Section 80C deduction is available for premiums paid to any insurer that has been authorised by the Insurance Regulatory and Development Authority of India (IRDAI). However, if the policy was issued after April 1, 2012, the premium paid cannot exceed 10% of the total guaranteed in order to claim a deduction under section 80C. To claim this discount for insurance issued before April 1, 2012, the premium paid must not exceed 20% of the total guaranteed. Furthermore, it is important to note that for a policy issued after April 1, 2013, covering the life of the individual with an impairment referred to them under Section 80U or an illness referred to under Section 80DDB, the premium must not exceed 15% of the sum assured in order to claim the deduction under Section 80C. “Sum assured” simply refers to the sum guaranteed to the survivor under the policy. This figure excludes any premiums that have been agreed to be refunded, as well as any incentive payments made under the policy.
Any amount received on the expiration of life insurance or amount received as a reward is fully exempt from Income Tax under Section 10 when the premium paid on the policy does not surpass 10% of the sum assured for plans offered after April 1, 2012, and 20% of the sum assured for policies issued before April 1, 2012. Policies obtained after April 1, 2013, on the life of a person with a disability or sickness listed under Sections 80U and 80DDB, where the amount received at maturity is tax-free if the premium paid does not exceed 15% of the sum insured, are also included. Where the fee paid exceeds 10% of the total insured, there is a tax – Any money received from life insurance whose premium is greater than 10% or 20% of the sum insured, depending on the circumstances, is completely taxed.
Starting in October 2014, if the amount paid from a life insurance policy exceeds Rs 1,00,000 and the policy is not protected by an exemption under Section 10(10D), the insurer must withhold TDS of 1% before making the payment. TDS will be deducted from bonus payments also. TDS would be deducted if the amount received is not less than Rs 1,00,000. However, the amount received will be fully taxable for you. In the income tax return, you can claim a credit for the TDS you paid. According to the Union Budget 2019, the TDS on insurance policy earnings would be reduced to 5% on the amount of income included in the proceeds received or payable upon maturity on/after September 1, 2019.
If a person under the age of 45 buys an insurance policy, the sum insured will be times the yearly premium, according to IRDA norms. As a result, the tax benefit will almost certainly be received by the insured. The minimum sum insured, on the other hand, will be limited if the buyer is above 45 years old and the policy’s term is shorter than ten years. The insured may forfeit the tax benefit in this instance. One of the most important aspects to examine before acquiring any financial instrument is its tax structure. However, purchasing insurance coverage only to save money on taxes is never a good idea.