Life insurance is one of the most essential investments for any individual to make. It provides the dependents of the insured a financial safety net in case of their demise. There are various tax benefits to investing in life insurance as well as pitfalls. The various deductions have been mentioned below:
Premium paid towards any life insurance policy that is approved by the Insurance Regulatory and Development Authority of India (IRDAI) is eligible for deduction under Section 80C of the Income Tax Act, subject to certain conditions:
– For policies issued after April 1, 2012, the premium amount should not exceed 10% of the assured amount.
– For policies issued prior to April 1, 2012, the premium amount should not exceed 20% of the assured amount.
– For policies issued after April 1, 2013, that cover an individual with a disability mentioned under section 80U or a disease mentioned under section 80DDB the premium should not exceed 15% of the sum assured.
If a policy satisfies the conditions under Section 80C of the Income Tax Act, the amount received at the maturity of the policy is fully tax-exempt under Section 10(10D). If the premium paid does not satisfy the conditions under Section 80C the amount received at the maturity of the policy is fully taxable.
Tax Deducted at Source on Insurance Policy
For policies not covered under Section 10(10D) of the Income Tax Act, if an amount exceeding Rs. 1 lakh is received a tax of 1% is deducted at the source by the insurer prior to making the payment, this is also charged on bonus payments. The insured can claim credit for this deduction on their Income Tax Returns. If the amount received is less than Rs. 1 lakh there is no tax deducted at source but the amount is fully taxable.