Taxes are hard to understand. Even Albert Einstein once called income tax filings one of the hardest things to understand. And while the comment was made several decades ago, computation and filing of income tax remain a complex task even today. The Indian government allows a host of tax deductions, exemptions and allowances for investments such as life insurance, provident fund or savings schemes.
The premiums paid for a life insurance policy are eligible for tax deductions, but before getting into the details, let us take a look at the rationale behind providing tax benefits for life insurance. The importance of life insurance cannot be overstated, which prompted the government to provide tax benefits.
With the number of accidental deaths, disability and incidence of terminal diseases on the rise, having a life insurance policy has become a necessity. Nearly 1.5 lakh people lose their lives in road accidents every year and numerous others are left disabled. The payout from a life insurance policy can be of immense help for the family members of accident victims. Similarly, life insurance policies pay a lump-sum amount if the insured is diagnosed with a terminal disease. Traditional life insurance plans have a savings component, which helps in accumulating a corpus to fulfil life goals like child’s education, marriage, buying a house or retirement. In the event of the sudden death of the insured, life insurance policies also help in taking care of the liabilities. Besides a host of benefits, investing in life insurance comes with a number of tax benefits.
Several sections of the Income Tax Act, 1961 deal with tax deductions and exemptions. Section 80C is the most comprehensive one of the lot. The section details various investments that qualify for deductions and the quantum of deductions one can claim in a year. Every taxpayer is allowed a deduction of Rs 1.5 lakhs per year under Section 80C of the Income Tax Act, 1961. To claim the deduction, you have to make certain investments and life insurance is one of the best options. Life insurance premiums qualify for deductions under the law.
A deduction can be claimed for premiums of policies bought for self, spouse or children. In case one claims a deduction for a policy taken for spouse, the policyholder will have to prove that the premiums are being paid from his/her income. If the spouse is employed, she cannot claim a deduction for the same policy.
The eligibility of premiums paid for tax deductions depends on the quantum of the payment and the date of the purchase of the policy. If the life insurance policy is bought post April 1, 2012, a deduction can be claimed only if the life insurance premium is less than 10% of the assured benefit. If the insurance plan has been bought prior to the specified date, the premium paid in a year should be less than 20% of the assured sum to claim a tax deduction.
In case the policy has been taken for a disabled person, you can claim a tax deduction under Section 80C if the insurance premium is less than 15% of the assured benefits. The disability should, however, be mentioned under Section 80U to be eligible for tax benefits. Being listed as a terminal disease in Section 80DDB is also a valid reason for qualifying for a tax deduction.
Along with tax deductions on the premiums, you can also get tax benefits on the payout of a life insurance policy. The benefits received from a life insurance policy are tax-free in the hands of the receiver under Section 10(10D) of the Income Tax Act. However, tax exemption for the benefits received is allowed only for policies with premiums less than 10% of the pre-decided benefits.
The importance of life insurance does not lie in the tax benefits they provide, but the financial security they guarantee. Its importance increases manifold in the absence of the insured. The insurer and the product should be chosen with extreme caution, taking into account the credibility and suitability. Canara HSBC Oriental Bank of Commerce Life Insurance’s iSelect term plan provides adequate coverage at affordable costs. The plan covers death and terminal illness, while the coverage can be extended to cover accidental death and disability as well.