Taxability And Tax Benefits With Insurance Policies

In the present unforeseen times, a life insurance policy becomes an essential investment. It is a good idea to cover your life because even though it cannot compensate for the emotional loss, at least your family members will be financially secure.

Taking a life insurance policy is as easy as booking a cab, there are various life insurance companies, which offer a variety of plans as per the needs and age groups. Merely checking the details properly will suffice to make a decision, but while choosing a plan, it is also advisable to consider the tax implications of taking life insurance.

Deduction under Section 80C

Premiums paid to insure your life or that of your spouse or child are eligible for deduction under section 80C of the Income Tax Act. It is eligible whether your child is dependent or independent, minor or principal, married or unmarried. Both an individual and a HUF can claim this deduction under section 80C.

There are only two requirements for this, first, the insurer must be approved by the Insurance Regulatory and Development Authority of India (IRDAI). And second, the premium paid should not surpass 10% of the Sum Assured, where the policy is issued after April 1, 2012.

For policies issued before April 1, 2012, to claim this deduction, the paid insurance premium should not cross 20% of the Sum Assured.

Meanwhile, if life insurance is covering the life of a person with a disability referred under section 80U or illness referred under section 80DDB then Premiums paid are eligible for deduction under section 80C if it doesn't surpass15% of the sum assured.

Exemption on maturity amount received under section 10(10D)

When the premium does not cross 10% of Sum Assured for policies issued after April 1, 2012, and 20% of Sum Assured for policies issued before 1st April 2012 - The amount received on maturity of a life insurance policy or as a bonus is fully exempt from income tax under section 10(10D).

It also includes policies taken after 1st April 2013 on the life of a person with disability or disease specified under sections 80U and 80DDB respectively, where the received amount after maturity is tax-free if the premium paid doesn't exceed 15% of the minimum amount assured under the policy to the survivor which is known as sum assured.

No exemption on the maturity of policies

On maturity of policies, there will be no exemption from income tax. Any amount received from a life insurance policy, where the premium exceeds 10% or 20% of the sum insured, depending on the case, is fully taxable.

TDS applicable on Life Insurance Policy

From October 2014, if the money received from a life insurance policy exceeds ₹ 1,00,000, TDS at the rate of 1% will be deducted by the policy insurer before making the payment, on life insurance policies that are not covered under an exemption u/s 10(10D). Bonus payments will be also liable for TDS deduction.

If the amount in concern is below ₹ 1,00,000 then there will be no TDS deduction but will be fully taxable for you. Credit can be claimed for TDS deducted from your I-T return.

The Union Budget 2019 proposes to revise TDS on insurance policy income to 5% on the amount of income included in the income paid or payable on maturity on or after September 1, 2019.

Tax Liability of Single Premium Insurance Policies

Let's take an example to understand taxability.
Consider Suresh having a policy with a maturity value of ₹ 1,10,000. He paid a premium of ₹ 45,000 on 16 September 2013 which is more than 10% of the sum assured. Thus insurance maturity earnings are taxable, and not eligible for any exemption u/s 10(10D) of the Income Tax Act. After maturity, Suresh surrenders it, and since the maturity payout exceeds Rs 1 lakh, the insurance company is liable to deduct tax at 5% of the income on maturity. Here TDS will be Rs 3,250 (5% of 110000-45000 ) and net income to Suresh will be Rs 61,750.

Suresh has to mention this maturity income under the head "Income from other sources" while filing his Income Tax Return. He can also claim credit for TDS against his tax liability as defined at the time of filing his income return.

Authored by CA Amit Gupta, MD, SAG Infotech.