How Life Insurance Can Be an Effective Tax Planning Tool

Life insurance plans provide complete financial protection to your family and also helps you in saving taxes. Here is all that you need to know about the tax benefits that you can avail from Life insurance plans.

Whether an individual is salaried or self-employed, tax planning should start with the commencement of the financial year. However, the activity that requires thorough planning is carried most hurriedly, and we end up investing without proper evaluation.

During the evaluation process, it is paramount to select only those Tax-saving instruments that have multiple benefits along with saving taxes. Life insurance plan is one such plan with mutual benefit of protecting and tax saving. Here is a detail about the tax implication on life insurance policies.

Tax Deduction On Premium

Under Section 80C of Income Tax Act, 1961, one can avail tax deduction of up to Rs.1,50,000 on the premium paid towards life insurance policies. This tax deduction is inclusive of premium paid on life insurance for spouse or child whether married or single, minor or major, independent or dependent. Both HUF and individual can claim the tax deduction on premiums paid under Section 80 C.

If the policy is issued after 1st April 2012, one can get the deduction on premium under Section 80C up to 10% of the sum assured, the premium paid above 10% of the sum assured is taxable. Policy purchased before 1st April 2012 can get a tax deduction on premium up to 20% of the sum assured. Premium paid above 20% of the sum assured is taxable.

Another important note is that a policy issued to an individual with a disability under Section 80U is liable for tax deduction on premium up to 15% of the sum assured. The same cap is applied for insurance issued to an individual with a disease referred to as under Section 80 DDB.

Section 80 C explains the sum assured as the minimum amount excluding any bonuses or premium that is assured to the survivor under the policy.

Tax Deduction on Maturity amount-

If the premium amount does not exceed 10% of the sum assured and is issued after 1st April 2012 and 20% if issued before 1st April 2012, the amount received after maturity is fully tax exempted. Any bonus received on maturity is also exempt from tax.

Maturity amount on policies issued to a person with a disability under section 80 C and person with any disease under section 80DDB is also tax-free if the premium amount does not exceed 15% of the sum assured.

Please note if the premium paid exceeds 10% or 20% of the sum assured as the date of issuance of the policy, the maturity amount is fully taxable.

TDS on the maturity amount-

If the maturity amount exceeds Rs 1,00,000, TDS of 1% will be deducted to amount if the policy is not covered under any exemption under Section 10 (10D). The TDS amount will be deducted by the insurer before making the maturity amount payment. TDS deduction is also applicable to the bonus amount.

For claiming any tax deduction under Section 80 C the gross premium amount must be paid and deposited in the same financial year i.e. between 1st April and 31st March (both dates inclusive).

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