life insurance tax benefits
By Okbima 13 May 2024 142

Life Insurance Tax Benefits In India: Eligibility Criteria & How To Save Tax?

 

Life insurance tax benefits in India offer tax benefits to the eligible individual. You must buy a life insurance policy from a recognized provider and ensure that their premiums are paid on time. By investing in a life insurance policy, you can save on your tax liabilities and secure your family's financial future. 

 

Life Insurance Tax Benefits In India

The Indian government offers tax benefits to encourage people to buy life insurance. These benefits are provided under the Income Tax Act, of 1961 &  can help you save amount on your taxes. Here are the two main tax benefits of life insurance in India.

Tax Deduction On Premiums (Section 80C)

  • You can claim a deduction for the premiums you pay for your life insurance policy from your taxable income. This applies to many life insurance plans, including term plans, endowment plans, whole life plans, and unit linked insurance plans (ULIPs).

  • Premiums paid for policies for yourself, your spouse, or your dependent children are eligible for this deduction.

  • There's a maximum limit of Rs. 1.5 lakhs per year which can be deducted under this section. This limit applies to all investments and expenses covered under Section 80C.

 

Tax Exemption On Maturity Or Death Benefit (Section 10(10D))

  • The maturity benefit or death benefit received from a life insurance policy can be exempt from income tax under certain conditions.

  • The tax exemption depends on the type of policy and the date it was issued.

  • For policies issued after April 1, 2012, the maturity amount is completely tax-exempt if the premium paid is less than 10% of the sum assured.

  • For older policies issued before April 1, 2012, the payout is tax-exempt if the premium paid doesn't exceed 20% of the sum assured.

 

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How To Save Income Tax With Life Insurance Policies?

In India, life insurance policies offer many ways to save income tax. Here's how you can save income tax with life insurance policies.

  • Section 80C Deductions: Premiums paid for life insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. The maximum deduction allowed under this section is Rs. 1.5 lakhs per financial year. This deduction is available for policies issued on or after April 1, 2012.

  • Maturity Proceeds: Maturity proceeds from life insurance policies are tax-free under Section 10(10D) of the Income Tax Act, subject to certain conditions. If the premium paid in any year exceeds 10% of the sum assured, the maturity proceeds become taxable.

  • Term Insurance Policies: Premiums paid towards pure term insurance policies, which provide only death benefits and no maturity benefits, are eligible for tax deductions under Section 80C. The proceeds received by the nominee in case of the insured's death are also tax-free under Section 10(10D).

  • Unit Linked Insurance Plans (ULIPs): Premiums paid for  ULIPs are eligible for tax deductions under Section 80C. Additionally, the maturity proceeds from ULIPs are tax-free under Section 10(10D), subject to the condition that the premium paid does not exceed 10% of the sum assured.

  • Riders and Add-ons: Premiums paid for riders or add-ons such as critical illness cover, accidental death benefit, etc., also qualify for tax deductions under Section 80C.

  • Tax-free Switching in ULIPs: ULIPs offer the flexibility to switch between funds without attracting any tax implications. This can be advantageous for tax planning purposes.

  • Tax Planning for HUFs: Hindu Undivided Families (HUFs) can also avail of tax benefits by paying premiums for life insurance policies. The premiums paid by the HUF can be claimed as a deduction under Section 80C.

  • Gift Tax Exemption: Life insurance policies received as gifts are exempt from gift tax under Section 56(2)(vii) of the Income Tax Act, provided the sum assured is more than 10 times the premium paid.

 

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Eligibility Criteria To Claim Term Insurance Tax Benefit

In India, to claim tax benefits on life insurance premiums under Section 80C of the Income Tax Act, 1961, certain eligibility criteria must be met.

  • Policy Ownership: The policyholder must be an individual taxpayer or a Hindu Undivided Family (HUF). Only policies owned by the taxpayer or the HUF are eligible for tax benefits.

  • Premium Payments: The premiums must be paid by the policyholder, either for their life insurance or for the life insurance of their spouse or children. Premiums paid by other family members or individuals are not eligible for tax benefits.

  • Type of Policy: Tax benefits are available for various types of life insurance policies, including endowment plans, whole life plans, term insurance plans, ULIPs (Unit Linked Insurance Plans), etc., subject to certain conditions.

  • Minimum Holding Period: For policies issued on or after April 1, 2012, to be eligible for tax benefits, the minimum holding period is 2 years. If the policy is surrendered or terminated before the completion of 2 years, the tax benefits availed in the previous years will be reversed.

  • Premium Amount: The premiums paid towards the life insurance policy should not exceed 10% of the sum assured in any year. If the premium exceeds this limit, the maturity proceeds become taxable under Section 10(10D) of the Income Tax Act.

  • Purpose of Insurance: The primary purpose of the insurance policy should be to provide life cover & not primarily for investment or savings. Policies primarily for investment purposes may not be eligible for tax benefits.

  • Tax Filing Status: To claim tax benefits, the policyholder must file their income tax returns and declare the premiums paid and benefits received from the life insurance policy.

  • Tax Documentation: The policyholder may need to provide documentary evidence of premium payments and policy details while filing their tax returns.

 

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Read More:

Universal Life Insurance Policy In India: Benefits, Types & How It Works?

What is Life Insurance Policy? Benefits & How Does it Work in India

Difference Between Insurance and Assurance: Meaning & Types

Types of Life Insurance: Definition & Benefits in India 2024

Safe Investments with High Returns In India

 

Conclusion

In conclusion, life insurance in India offers many tax benefits, making it a popular investment option. To be eligible for these benefits, you must ensure that your insurance policy meets certain criteria such as the amount of premium paid & the sum assured. It is important to understand the eligibility criteria & carefully plan their investments to maximize the tax savings offered by life insurance policies in India.

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