Tax Benefits of a Life Insurance Plan

Tax benefits are an important element of a life insurance policy. Apart from the insurance coverage a life insurance policy also offers certain tax benefits that are one of the most appropriate taxes saving investment option. 

Many individuals purchase life insurance policy not just for the insurance benefits but also to save on the taxes.

You Might Also Like To Read Kinds of Life Insurance Policies

So, we have listed down some of the tax benefits that a life insurance policy offers under the various sections of the Income Tax Act 1961.

Savings on Tax by holding a Life Insurance Policy:

Section 80C:

Under Section 80C of Income Tax Act 1961, the policyholder can benefit from the tax benefit on the premium amount paid for life insurance policies. Some main points under section 80C tax deductions are:

  • Under section 80C, the tax deduction is obtainable by Hindu Undivided Families (HUF) and individuals.
  • Under section 80C of the Income Tax Act, premium remunerated towards life insurance policies up to a maximum of Rs.1,50,000 is entitled to the tax deduction.
  • Deductions are valid if the sum of premium paid in a fiscal year is 20% of the sum assured total of the insurance policy. This is only related to the insurance policies that were procured before 31st March 2012.
  • For all the policies issued after 1st April 2012, the tax deductions valid on the sum of premium paid in a fiscal year is 10% of the amount assured.
  • Under section 80C(5) if the policyholder willingly ends his policy or if the policy is concluded before 2 years from the commencement date of the policy, then the policyholder will not get any benefits on the paid premium, under section 80C of the Income Tax Act.
  • In case of ULIPs, if the policyholder willingly ends his policy or if the policy is concluded before 5 years from the commencement date of the policy, then the policyholder will not get any benefits on the paid premium, under section 80C of the Income Tax Act.

Section 10(10D):

As per the Section 10(10D) of Income Tax Act, 1961, the sum assured amount inclusive of the bonus (if any) paid on maturity of the policy or surrender or in case of demise of the policyholder is completely tax-free for the recipient. Some of the main points of section 10(10D) of tax deductions:

  • Any sum payable to the policyholder under life insurance policies is valid for the tax deduction. The payable amount can be-
  • Due sum by way of bonus
  • Survival benefit
  • Death benefit
  • Maturity benefit
  • Surrender value
  • Section 10(10D) deduction is also relevant for gains and profits from a ULIP.
  • Tax benefit under section 10(10D) on maturity is given when the paid premium towards the policy does not exceed more than 10% of the sum assured amount.
  • Any maturity amount of the insurance policy or bonus sum availed by the recipient in case of death of the insured is completely exempted of the tax deduction.
  • Also, the life insurance policy for disabled people is entitled to tax exemption as per the guidelines under section 80DDB in case the premium amount goes beyond 15% of the sum assured amount.

Top 5 Tax Saving life insurance plans:

  1. Bajaj Allianz i-Secure
  2. Aviva i-Life Plan
  3. HDFC Life Click 2 Protect Plus
  4. LIC New Jeevan Anand
  5. SBI e-Shield

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