How Much Tax Benefits We Can Claim With Life Insurance Policy?

How much tax benefits we can claim with Life Insurance policy?

The tax benefit on premium paid for a life insurance policy is an important additional advantage of life insurance. One should, therefore, understand all aspects of claiming this tax benefit in order to avoid losing it.

Section 80C and Section 80D of Income Tax Act entitles specified taxpayers to claim deduction for the entire amount paid to the insurance company for specified insurance schemes.

Deduction under Section 80C

If an individual has paid an insurance premium to insure his/her own life or the life of his/her spouse or child, such premium payments are eligible for deduction under Section 80C of the Income Tax Act. The deduction is allowed irrespective of the child being dependent or independent, minor or major, married or unmarried. Both an individual and a Hindu Undivided Family (HUF) can claim this deduction under Section 80C.

Tax deduction under Section 80C of the Income Tax Act, 1961, allows exemption up to INR 1.5 lakh per annum.

To claim deduction under Section 80C, following points to be considered:

Premium paid should not exceed 20% of the sum assured for policies issued prior to 01 April 2012
Premium paid should not exceed 10% of the sum assured for policies issued after 01 April 2012
Premium paid should not exceed 15% of the sum assured for policies issued after 01 April 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB

“Sum assured” is the minimum amount assured under the policy to the survivor. This amount does not include premium which has been agreed to be returned or any payment of bonus on the policy.

Further, there is a minimum lock-in period for policy to retain tax benefit under section 80C. The policy holder is required to hold the life insurance policy and pay the premiums regularly for a minimum number of years as specified in Section 80C in order to retain the tax benefit claimed.

In case of single premium life insurance policy, 2 years from date of commencement of policy
In case of ULIPs, at least 5 years, for which premium has been paid, from start of policy
In case of any other life insurance policy, at least 2 years, for which premium has been paid, from start of policy
In case of any other life insurance policy, at least 2 years, for which premium has been paid, from start of policy

According to the Section 80C(5), an individual cannot claim the benefits under the Section 80C in the following scenarios:

Policyholder surrenders his/her policy voluntarily or
Policy is terminated by the insurer before a predefined time limit, on failure to pay the dues (i.e. premiums)

This means that no deduction will be allowed for the premium paid for the year in which the policy is surrendered/terminated and the deductions claimed in earlier years for premium paid, if any, will be considered as his income in the financial year in which the policy is surrendered or terminated and taxed accordingly.

When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 1 April 2012 and 20% of sum assured for policies issued before 1 April 2012– any amount received on maturity of a life insurance policy or amount received as bonus is fully exempt from Income Tax under Section 10(10D). Also, covered here are policies taken after 1 April 2013, on the life of a person with a disability or a disease specified under Sections 80U and 80DDB respectively, where the amount received on maturity is tax-free provided the premium paid does not exceed 15% of the sum assured.

Deduction under Section 80D

Section 80D of the Income Tax Act, 1961 allows tax benefits on health insurance premium. So, if your life insurance plan has health-related inbuilt or add-on cover such as Critical Illness Rider, Surgical Care Rider, Hospital Care Rider, etc. you can avail tax benefits.

To claim deduction under Section 80D, following points to be considered:

Maximum limit on premiums: Tax deduction can be only availed for an amount up to INR 25,000
Maximum limit on Life Insurance premiums paid for your dependent parents: One can avail an additional tax deduction benefit of INR 25,000/- if paying premiums for health insurance policy in your parent’s name
Maximum limit on Life Insurance premiums paid for dependent senior citizens: One can avail tax benefit on the same to an amount up to INR 30, 000 if paying premiums for a health insurance plan in your senior citizen parent’s name