Using Tax Benefits of Life Insurance in Your Financial Plan

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Tax Benefits of Life Insurance

Using Tax Benefits of Life Insurance in Your Financial Plan

When you buy a life insurance policy, you get tax benefits which reduces your taxable income. This advantage makes insurance a lucrative investment for the long-term. But are you aware of all the tax benefits? Let’s run through the different ways of saving on taxes and ensure that the least amount of TDS is applicable on your policy.

Tax Deductions Applicable Under Section 80C

Under Section 80C of Income Tax Act, 1961, you can claim tax exemption on the premiums paid towards securing life insurance.

Who can avail life insurance tax benefits?

This tax exemption can be claimed for:

Yourself

Your spouse

Your children

Terms and Conditions:

Here are certain provisions you need to know about the tax benefits of life insurance:

If you bought the policy before  31st March 2012, then the premium should not be more than 20% of the sum assured to be eligible for tax exemption under Section 80C

If you bought the policy after or on 1st April 2012, then the premium should not be more than 10% of the sum assured to be eligible for tax exemption under Section 80C

The premium should be less than 15% of the sum assured if the policy was bought after or on 1st April 2013 for 

An individual with a disability as mentioned under Section 80U or

A person with certain ailments as mentioned under Section 80DDB

Tax Deductions Applicable Under Section 10(10D)

Under Section 10(10D), you can claim tax exemption on the maturity benefit and bonuses paid towards life insurance plans. In the event of your death, your beneficiary will also be able to claim the death benefit under Section 10(10D) for tax exemption.

Terms and Conditions:

Here are certain things you need to keep in mind to reap the tax benefit on term insurance:

If you bought the policy after 1st April 2003 but before 31st March 2012 and the premium is more than 20% of the sum assured, then the policy proceeds would be fully taxable.

If you bought the policy before or after 1st April 2012 and the premiums paid do not exceed 20% or 10% respectively, then the payout received is tax-free

If the premium paid does not exceed 15% of the sum assured for a disabled person under Section 80U and a person with an ailment under Section DDB, then the policy proceeds are tax-free

If you have bought a Keyman insurance policy, then the proceedings are fully taxable

Tax Deducted at Source (TDS) on Life Insurance Policy

If the policy proceeds are not exempted under Section 10(10D), then a TDS of 2% is applicable on the sum received by you under Section 194DA of the Income Tax Act, 1961. But if the sum received by you is less than INR 1,00,000 but isn’t exempted under Section 10(10D) then TDS won’t be applicable on the policy proceeds. You should make sure you submit your PAN to your insurance company to avoid higher TDS charges.

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