How is Your Tax Liability related to Life Insurance?

Life insurance plans are said to be tax saving in nature. They help you reduce your tax liability at the time of buying the policy. Moreover, the policy benefits that you receive are also tax-free benefits. Thus, besides providing financial security against the risk of premature death, life insurance plans also help you in saving taxes.

However, many individuals might not know about the tax-saving benefit of life insurance policies. Especially when buying term insurance plans, you might think about the financial security that you get instead of the tax implication of the policy. However, knowing the tax implication of term insurance plans is also important as it would help you plan your taxes in an effective way. So, here’s looking at how term insurance plans, as well as life insurance plans, on the whole, save taxes –

Tax benefit under Section 80C and 80CCC

The premiums that you pay towards life insurance plans (except pension plans) are allowed as a tax deduction under Section 80C of the Income Tax Act, 1961. The maximum deduction available is Rs.1.5 lakhs. For pension plans, then the applicable section is 80CCC. Under this section, premiums paid towards deferred annuity policies are allowed as a tax-free investment. The limit is Rs.1.5 lakhs and it includes Section 80C deductions too. To be eligible for a deduction under Sections 80C and 80CCC, however, the following conditions would have to be fulfilled –

• The policy should be taken for yourself, dependent spouse or dependent children

• The premium paid for the policy should be limited to 10% of the sum assured. If the premium exceeds 10% of the sum assured, the deduction would be allowed only on that amount which is 10% of the sum assured. For example, say you are choosing a sum assured of Rs.10 lakhs. In that case, your premium should be limited to Rs.1 lakh to claim the full deduction. If your premium is Rs.1.25 lakhs or more, the amount in excess of Rs.1 lakh would be taxed in your hands at your income tax slab rates.

• If, however, you have bought the life insurance policy on or before 1st April 2012, the premium should be up to 20% of the sum assured.

Thus, by investing in life insurance plans, you can reduce your taxable income by Rs.1.5 lakhs. If you are in the 30% tax bracket, this reduction in your taxable income can help save you Rs.45, 000 in your tax liability.

Tax benefit under Section 80D

If you buy health plans offered by life insurance companies or if you choose any health benefit rider in your life insurance plans, the premiums paid towards them would be eligible for a deduction under Section 80D. You can claim a maximum deduction of up to Rs.25,000 which would increase to Rs.50, 000 if you are a senior citizen.

Tax benefit under Section 10 (10A)

This section is relevant for benefits received from pension plans. If you have invested in a deferred pension plan, you can withdraw up to 60% of the accumulated corpus when the plan matures. This is called commutation. When you commute or withdraw the accumulated amount, 1/3rd of the corpus would be allowed as a tax-free income in your hands. Suppose, you have accumulated a corpus of Rs.15 lakhs in a deferred annuity plan. On maturity, you would be allowed to withdraw up to Rs.9 lakhs in a lump sum while the remaining corpus would be used to pay lifelong annuities. Of this withdrawal, 1/3rd of the corpus, i.e. Rs.5 lakhs would be tax-free in your hands. The remaining Rs.4 lakhs would attract tax at your income tax slab rates.

Tax benefit under Section 10 (10D)

Under this section, the maturity benefit which you receive from life insurance plans would be considered as a tax-free income. However, to be eligible for tax exemption under this Section, the premium should be up to 10% or 20% of the sum assured depending on when you bought the policy. If the premium exceeded 10% or 20% of the sum assured, the entire amount of maturity benefit would be taxable in your hands at your income tax slab rate.

The death benefit payable under life and term insurance plans is always exempted from tax irrespective of the premium paid for the policy.

Given these tax benefits, you should invest in the best term life insurance plans for providing complete financial security to your family members in your absence. The best term life insurance plans would not only take care of emergencies, they would also help in reducing your taxable income. To invest in the best term life insurance plans you can choose the best investment website of ETMONEY.com. The reasons why ETMONEY is the best investment website is because –

• It allows online and paperless buying

• You get instant coverage

• No lengthy documentation is involved

• You get an instant tax proof

Moreover, this best investment website is tied up with life insurance companies thereby allowing you a choice of the best life insurance plans available in the market. So, choose the best - both the insurance policy and also the mode of buying it.

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