Tax on Guaranteed Income Plan

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Guaranteed Income Plan is a type of savings plan cum insurance plan that promises guaranteed annual income after a fixed period. It is non-linked, non-participating endowment plan where the policyholder pays the premium until maturity and gets a regular payout along with insurance benefit.

There are 4 broad classifications—

  1. Premium paid for 5 years
  2. Premium paid for 7 years
  3. Premium paid for 10 years
  4. Premium paid for 12 years

In case of premium paid for 5 years, the policyholder will make the payment for 5 years after which depending upon the policy cover amount, and the term selected which is 5/10, he will get an annual payout for 5/10 years.

In addition to the regular income, he will also get the insurance benefit wherein in case of any mis-happening, the nominee will get the lump sum amount. Fortunately, if the policyholder survives, then the entire corpus will be disbursed at the time of maturity.

Similarly, for the 7/12 years premium policy, annual payout will be made for 8 years after the end of premium payment term. For 10 years premium policy the annual payout will be made for 10 years after the end of premium payment term.

For instance, if you choose the 5 year premium plan with a 10 year term, then you need to pay the premium for 5 years. After the end of first 5 years, you will start receiving annual income depending upon the maturity amount from the 6th year until the end of 15th year.

So, if the policy was taken in 2018, you will pay premium until 2023 and you will start receiving annual income from 2024 till 2033. During this time period if any mishap happens that leaves your family alone then your nominee will receive the entire corpus. If fortunately nothing happens, then at the end of 2033 you will receive the entire maturity amount.

Having discussed the policy features, now let’s get to the taxability part of it,

Tax implications of Guaranteed Income Plan 

There are two components in Guaranteed Income Plan, first one being the investment part i.e. the payment of premium, and second being the maturity amount.

Deduction under section 80C

The Income Tax Act deduction section 80C provides for the deduction of premium paid towards life insurance. Since guaranteed income plan offers life insurance as well, the premium paid towards it is allowed as a deduction under this section.

However, this deduction has an overall cap. It includes a list of investment and expenses that cover under the ambit of section 80C. And the total allowable deduction is capped at Rs. 150,000. 

Deduction under section 10(10D)

The Income Tax Act, provides for exclusion of certain incomes making it exempt, one of which is the amount received as maturity from life insurance policy. But it is subject to certain conditions which are given below:-

  • For an insurance policy taken between April 2003 till March 2012, if the amount of annual premium paid is more than 20% of the sum assured, then the amount received on maturity will be included in the total and shall not be eligible for exemption.
  • Similarly, for an insurance policy taken on or after April 2012, if the amount of annual premium paid is more than 10% of the sum assured, then the amount received on maturity will be included in the total and shall not be eligible for exemption.
  • For an insurance policy taken on or after April 2013, who is-

(i)  A person with disability or a person with severe disability as referred to in section 80U; or

(ii)  Suffering from disease or ailment as specified in the rules made under section 80DDB,

If the amount of annual premium paid is more than 15% of the sum assured, then the amount received on maturity will be included in the total and shall not be eligible for exemption.

When the premium is paid in accordance with the conditions mentioned above, deduction in respect of maturity and premium payment is allowed.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.