Life Insurance Premium is a premium which is paid by a person for insuring the life of the person insured. In case any mis-happening happens to the life of the person insured, the life insurance company gives an amount for which the life was insured.
To encourage people to opt for a Life Insurance Policy, the Govt allows tax deduction on payment of Life Insurance Premium. Moreover, it also gives several tax benefits for the maturity amount which is received back from the Life Insurance Company.
Tax Deduction on Payment of Life Insurance Premium – Section 80C
Deduction under Section 80C is allowed to the person who is making the payment for insuring the life of person insured. Although a person can pay life insurance premium on behalf of any other person as well, he would be allowed a tax deduction for payment of life insurance premium only in case the premium paid is for insuring the life of the following:-
- In case the premium is paid by an Individual – Tax Deduction under Section 80C would be allowed for payment of life insurance premium for insuring the life of self, spouse and any child of the individual. In case of tax deduction for life insurance premium of child, the child may be dependent or independent, male or female, married or unmarried. If the female child is married, then also the deduction would be allowed. However, the Life Insurance Premium paid for insuring the life of brother/sister or parents is not allowed to be claimed as a deduction under Section 80C.
- In case the premium is paid by HUF – Tax Deduction under Section 80C would be allowed for payment of life insurance premium of any member of the HUF. (Recommended Read: How to save Tax by creating HUF)
It is also to be noted here that the tax deduction of life insurance premium is allowed in the year in which the premium is paid and not in the year in which it became due. For eg: If life insurance premium is paid in advance for next 2 years, the benefit will not be divided in 2 separate years but will be claimed in the year of receipt itself.
Similarly, if the life insurance premium payment is delayed and postponed to the next year – tax deduction would only be allowed in the year of actual payment and not in the year in which it was actually due.
Maximum Deduction allowed for Payment of Life Insurance Premium
Deduction under Section 80C is allowed only if the premium paid is upto 10% of sum assured for the policy issued on or after 1st April 2012. In case of policy issued before March 31, 2012 deduction will be allowed only for premiums upto a maximum of 20% of the sum assured.
The maximum total amount that can be claimed as a deduction for payment of life insurance premium is Rs. 1,50,000 for each financial year. This deduction of Rs. 1,50,000 is combined total cumulative deduction allowed for investments in all specified instruments. The most popular of these instruments are:-
- PPF Account
- Tax Saving Mutual Funds
- Ta x Saving Fixed Deposits
- National Savings Certificate (NSC)
- Repayment of Principal Amount of Home Loan
It is important to note that deducted claimed earlier will be disallowed if the policy is terminated either by notice or by failure to pay any premium in case of
- Single Premium Policy: Within 2 years after the commencement date
- Regular Premium Policy: Before premium has been paid for 2 years.
Tax on Amount received on Maturity of the Insurance Policy
Any amount received at the time of maturity of the insurance policy (including any bonus received) is exempted from the levy of any income tax under Section 10(10D) of the Income Tax Act.
However, the following amounts received under a life insurance policy are not exempted from the levy of income tax. In other words, all amounts received except the following are exempted from the levy of income tax:-
- Any amount received under a Keyman Insurance Policy
- The amount received from Life Insurance Policy if the insured disabled depended predeces the individual, the amount received by the individual would be deemed as the income of that year of the person receiving the amount [Section 80DD & Section 80DDA]
- Any amount received from Life Insurance Policy issued on or after 1st April 2003 but on or before 31st March 2012, in respect of which the premium payable for any of the year during the term of the policy exceeds 20% of the actual sum assured
- Any amount received from an Life Insurance Policy issued on or after 1st April 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10% of the actual sum assured. (15% in case the policy is for insuring the life of a disabled dependent)
The above mentioned amounts would be added to the total income of the individual and taxed as per the applicable income tax slab rates.
It is to be noted that sub-clause (c) and (d) will not apply if the amount received is on the death of the person.
As the income tax would be applicable in the above mentioned 4 cases, TDS would also be deducted on amount received under a life insurance policy @ 2%
No Tax would be levied and No TDS would be applicable if the amount received is not covered under the above mentioned 4 circumstances.
Other Relevant Points
- Service Tax levied on the Life Insurance Premium is also allowed to be claimed as a Deduction under Section 80C
- The above mentioned norms apply to all Life Insurance Policies irrespective of whether such policy has been taken from Life Insurance Corporation or any other Insurance provider.