Life insurance plans can be bought in the form of term plans, money back plans and unit linked plans. The most interesting part of these plans is that the payable premiums are completely tax-exempted.
These tax deductions can be availed by the policyholder, their spouse, and dependent children. For instance, a life insurance policy allows you to have a tax exemption of 1.5 Lakhs annually under Section 80C of the Income Tax Act.
However, there are some important points which should be noted while you use these insurance plans as a tax planning source.
Different Tax-Exemptions for Different Insurance Plans
Section 80CCC offers a tax deduction of up to 1 Lakh for a pension or annuity plan. As the accumulated premium reaches its maturity, a part of your income (2/3rd) is taxed while the remaining amount is exempted from any tax (1/3rd).
If the policyholder is met with an unfortunate accident leading up to his/her death, the claim asked by the nominee is free of any tax under Section 10C. The same benefits can be availed if you purchase a ULIP and retirement plan under Section 80CCC. Hence, life insurance policy is an Exempt-Exempt-Exempt (EEE) policy. This means the invested amount, the earnings on that investment, and the receivable amount – all money is exempted from any taxes.
if a life insurance policy has been bough after 1st April 2012, it is eligible for tax-exemption only if the premium amount is not more than 10% of the receivable sum. However, if the policies have been issued before the above date, the premium must not be more than 20% of the receivable to be eligible for tax benefits. Similarly, a policyholder is eligible for a 15% deduction of the receivable sum if he/she has been in possession of such a policy on or after 1st April 2013. This can happen only if he/she has bought a policy due to suffering from any disability or an illness listed under Section 80U and Section 80DDB, respectively.
Under Section 10 (10D), the risk coverage or claims of a life insurance policy teamed up with the bonuses is also tax-exempted. The claim must have been received in the form of either death benefit to the nominee or survival benefit to the policyholder on the maturity of the policy.
However, there are some exceptions:If the total payable premiums of the policy exceed 20% of the receivable claim, there would be no tax-exemption of premium.
The total premium is more than 10% of the total risk coverage and the policy has been in possession on or after 1st April 2012, it is not tax-exempted.
If you have purchased a Key man insurance policy which is a life insurance policy for covering only important (Key) people of a company, - the claim is benefited by the company is not tax exempted.
If a dependent of policyholder is handicapped or disabled, and he/she meets with death before he/she is able to pay his/her premiums – these amounts are counted as income and are not tax-exempted under Section 80DD (3) and 80DDA (3).
Considering all of these exemptions that you can avail by getting a insurance policy, it could definitely be useful as a powerful tax-saving instrument.
