Other than the advantage of securing one’s life by taking a Life Insurance Policy, there are income tax benefit in form of deduction & exemption on both
- Premium payment (under section 80C), and
- Receipt of maturity value (with some conditions).
In this article, we will cover tax deduction on payment of premium and exemption of maturity value from income tax.
Let’s get to it one by one!
1. Deduction of Payment of Insurance Premium [Section 80C]
The premium for life insurance paid by an individual or HUF shall be liable for deduction under section 80C if such premium is paid for:
- Child [ can be dependent or independent]
- In case of HUF, any member of such HUF
This deduction is provided on payment basis i.e arear premium or advance premium will be eligible for deduction in the year of payment. GST or service tax on such premium is also eligible for deduction.
Mr. Tiwari took life insurance policy for his daughter from HDFC on 1st April 2017 and paid Rs.20,000/- for 2 years i.e FY 2017-18 and 2018-19 [10,000 for 1 year]. While filling ITR for AY 2018-19 [FY 2017-18] he can claim the whole of Rs.20,000/- as the deduction under section 80C.
Maximum Deduction of Premium for Life Insurance
For section 80C, the maximum deduction is limited to Rs.1,50,000/- only.
Apart from the above limit, the deduction is further limited to:
- 20% of actual sum assured [for a policy issued up to 31st March 2012] [80C(3)]
- 10% of actual sum assured [ for a policy issued on or after 1st April 2012] [80C(3A)]
- 15% of actual sum assured [for a policy issued on or after 1st April 2013 for a person covered under section 80U and 80DDB] [proviso 80C(3A)]
Mr. Shukla buys a life insurance policy of a capital sum assured of Rs. 8,00,000 on 1st April 2017 and paid Rs. 90,000/- as a premium during FY 2017-18.
The deduction under section 80C will 10% of capital sum assured i.e. Rs. 80,000(10% x 80000).
Hence, out of Rs. 90,000 premium paid by him, he would be eligible for deduction for only Rs. 80,000 & balance Rs. 10,000 would become useless for tax planning.
2. Exemption of Maturity Value of Life Insurance
Matured value of a life insurance policy (including bonus) is a taxable income and this value will form part of “Income From Other Sources” of the recipient.
However, it will be exempted in following cases where:
- The insured person is alive and complies with prescribed conditions, or
- The insured person is dead. (Exempted in the hands of the recipient)
Case 1: Insured Person is alive
The amount received at the time of maturity of the policy is exempt from tax in the hands of the policyholder, provided following conditions are fulfilled [u/s 10(10D)]–
- If the policy was taken on or after 1st April 2012, and the premium amount does not exceed 10% of the actual sum assured** [ 10% would be replaced by 15% if the premium is paid on or after 1st April 2013 for insuring the life of a person with a disability.] or
- If the policy was taken on or after 1st April 2003 but on or before 31st March 2012, and the premium amount does not exceed 20% of the actual sum assured.
**Actual sum assured doesn’t include bonus or any premium which will be returned at the time of maturity.
Case 2: The Insured person is dead
In the case of death of a person, any sum received on maturity (including bonus) will be exempted in the hands of the recipient. [Under section 10(10D) of income tax act]
Specified cases where the matured value is fully taxable
The matured value will be fully taxable in the hands of the recipient if such amount is received under:
- Any policy on the life of a keyman a.k.s keyman insurance policy. Or
- Section 80DD(3) or 80DDA(1)
TDS on Life Insurance maturity value
Under section 194DA, the tax shall be deducted at source (TDS) on payments of maturity value if:
- such amount is not exempt under section 10(10D), or
- such amount is not more than Rs. 1 lakh in a financial year.
At the time of receipt of maturity value, the recipient is required to provide PAN details to the insurer. In case of failure to provided PAN details, TDS will be deducted @ 20%.
Disclosure of Maturity value in your income tax return
Follow the below step:
Step #1: Disclose taxable matured value under the head “Income from other sources” (including TDS if any)
Step #2: Disclose your TDS amount using either form 26AS or form 16A (generally it get auto-populated in online forms)
Step #3: Go to exempted income box, select section 10(10D) and disclose the exempted receipt [In ITR (java file) of AY 2018-19 it is available in tab “Taxes paid” ]
Exemption of section 10(10D) is available only if the premium is within the prescribed percentage.
The whole maturity value will be taxable if the premium is above the prescribed percentage. In this case, skip step #3 while filing the tax return.
Tax on Surender of Life Insurance Policy [u/s 80C(5)]
When a life insurance policy is encashed before its maturity i.e surrendered, the insured person receives a lump sum amount.
This lump sum value consists of deposited premium and interest on those deposits.
The premium portion of surrender value will be taxable if it was claimed as a deduction under 80C and:
- The premium for the 1st 2 years is not paid, or
- In the case of a single premium policy, the policy is surrendered within 2 years.
This will be taxed in the year of surrender or the year in which the contract ceases.
Mr.Luv Kumar took an LIC on 1st April 2015 and paid all the premium of Rs.30,000/- up to 31st March 2016. He claimes this payment as the deduction under 80C.
He fails to pay for the financial year 2016-17.
As he didn’t pay the premium of 2nd year, his policy will expire on 1st April 2017.
He will be liable to pay tax on the premium amount i.e Rs.30,000/- in FY 2017-18 [AY 2018-19] as “Income from other sources”.