Life insurance plans are among the most important and necessary needs for providing a financially stable and pleasant life for your loved ones. Even in your absence, the capital advantages of life insurance plans help your family construct a safe and secure future. Furthermore, there are new tax slab benefits for life insurance plans under Sections 80C and 10D of the Income Tax Act.
Section 80C allows you to deduct up to 1.5 lakh in premiums paid for a life insurance plan. In contrast, Section 10(10D) makes income on maturity tax-free provided the premium is less than 10% of the total assured or the value guaranteed is at least 10 times the premium.
However, if the total promised is less than ten times the premium – for example, if you pay Rs.1 lakh as premium for a sum assured of Rs.5 lakh – you would get a premium reduction of up to 10% of the sum assured. In this case, your deduction will be Rs.50,000 rather than Rs.1 lakh.
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Deduction under Section 80C
If you paid an insurance premium to insure your own life or the life of a spouse or child, the premium payments are deductible under section 80C of the Income Tax Act. The deduction under section 80C is permitted whether your kid is dependent or independent, minor or major, married or unmarried.
Section 80C allows both individuals and HUFs to claim this deduction. Many taxpayers are unsure if this deduction is solely available for life insurance plans purchased via LIC. This is not correct. A Section 80C deduction is available for premiums paid for a life insurance plan with any insurer authorized by India’s Insurance Regulatory and Development Authority (IRDAI).
However, to claim a deduction under section 80C, the premium paid must not exceed 10% of the sum guaranteed if the policy was issued after April 1, 2012. To claim this discount for insurance issued before April 1, 2012, the premium paid must not exceed 20% of the total guaranteed.
Furthermore, it is essential to note that for a policy issued after 1 April 2013, covering the life of an individual with a disability referred to in Section 80U or a disease referred to in Section 80DDB. The premium cannot exceed 15% of the sum assured to claim the deduction under Section 80C. The term “sum assured” simply refers to the minimum amount guaranteed to the survivor under the insurance. This sum does not include the agreed-upon refund of premiums or any incentive payments made under the insurance.
Exemption under section 10(10D) on Maturity amount received
When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after April 1, 2012, and 20% of the sum assured for policies issued before April 1, 2012, any amount received on maturity of life insurance plans or any amount received as a bonus is fully exempt from new tax slab under Section 10. (10D).
Policies taken after 1 April 2013 on the life of a person with a disability or an illness described under Sections 80U and 80DDB, respectively, are also covered. The amount received on maturity is tax-free if the premium paid does not exceed 15% of the sum insured.
No exemption from income tax on the maturity of policies
Taxation occurs when the premium paid exceeds 10% of the total guaranteed – Any money received from life insurance plans when the premium is greater than 10% or 20% of the sum insured is completely taxed, depending on the circumstances.
TDS on life insurance policy
Starting in October 2014, if the amount paid from a life insurance plan is more than Rs 1,00,000 and the policy is not protected by an exemption under Section 10(10D). The insurer must withhold TDS at 1% before making the payment. TDS will be deducted on bonus payments as well.
If the amount received is less than Rs 1,00,000, no TDS will be deducted, but the amount will be fully taxable to you. TDS deducted from your new tax slab return can be claimed as a credit.
The union budget 2019 proposes lowering the TDS on insurance policy earnings to 5% on the amount of income included in the proceeds received or payable upon maturity on or after September 1, 2019.
Tax liability of single premium insurance policies
Taxpayers may be unsure how to approach rewards from a single-premium insurance policy. Let’s look at an example to grasp taxability better. Consider Sandesh, who purchased an insurance policy with a maturity value of Rs 1,10,000 from an insurance provider. On September 16, 2013, he paid a single premium of Rs 45,000. 10% of the premium worked out to Rs 11,000 in rupees.
The premium of Rs 45,000 is greater than 10% of the total guaranteed. As a result, the insurance maturity proceeds are taxable and are not excluded under section 10(10D) of the Income Tax Act. Sandesh surrendered the policy on September 16, 2019. Because the maturity payment exceeds Rs 1 lakh, the insurance firm must withhold a new tax slab from the maturity proceeds.
Before distributing the payment to the taxpayer. The insurance company is required to subtract 5% of the income component of the payment. The TDS will be levied on the net maturity proceeds, which in this case would be Rs 65,000. (1,10,000-45,000). TDS will be 5% on Rs 65,000, equal to Rs 3,250. Sandesh will receive Rs 61,750 in net revenues (65,000-3,250).
Sandesh should record his income tax return net maturity profits as “income from other sources.” Sandesh can also claim a TDS credit of Rs 3,250 against his tax bill when he files his income tax return
Wrapping It Up
Buying life insurance plans is essential, mainly if your husband and children rely on your income to survive. Even if your spouse works, it is a good idea to ensure your life – it will not compensate for the emotional loss, but your family members will be financially secure.
In India, several life insurance firms offer hundreds of products to suit a wide range of demands and age groups. You should also examine the new tax slab consequences of purchasing life insurance plans when selecting a plan.