Life insurance policies help you secure your family’s financial future by providing a sum of money in case of your premature demise. However, a life insurance plan has more to it. One of the benefits of buying life insurance is saving on taxes. In addition to maturity/death benefits, life insurance contracts qualify for tax deductions under Sections 80C and 10(10D) of the Income Tax Act of 1961. In this article, we will discuss the tax benefits of life insurance. To understand the process better, let us first understand the meaning of income tax.
What is Income Tax?
An individual, business, or another person who earns net income is subject to income tax, a type of direct tax. According to the Income Tax Act of 1961, the Government of India collects income tax in India. The funds received by the government are used to cover costs associated with infrastructure, development, other public services, and other similar expenses required to carry out the duties and obligations of the government necessary to operate a nation.
The amount subject to taxation varies according to the individual's annual income and the income tax slab applicable to that individual. Income tax is currently one of the most important government funding sources. However, there are a few ways by which you can save on taxes and buying life insurance is one of them.
Life Insurance Tax Benefits
The majority of us are aware that payments made for a life insurance policy qualify for a tax deduction under Income Tax Act Section 80C. So, when you buy life insurance, you will save on your tax, and these benefits are mentioned under the Income Tax Act of 1966. Let us dive into the benefits of life insurance under section 80c and section 10(10D) of income tax to get a clear view of the benefits that you will receive after buying the best life insurance policy for yourself. Let us look at different sections under the income tax act to understand the tax benefits you will get when you buy the best life insurance.
- Section 80C: This provision allows you to deduct life insurance premiums paid for you, your spouse, or your kids from your taxable income. You will be able to deduct a maximum of 1.5 lakhs.
- Section 10(10D): If certain requirements are completed in accordance with Section 10(10D) of the Income Tax Act, life insurance policy returns are tax-free.
- Section 10(10A): When you retire, a third of the income you get from a pension plan is tax-free.
- Section 80CCC: Tax advantages are available for pension/retirement insurance payments up to INR 150,000.
- Section 80DD: Up to INR 75,000 in premiums for dependents with disabilities are tax deductible annually. A bigger deduction of INR 1,000,000 is available if the defendant has a severe impairment.
Tax Benefits Under Section 80C
The Income Tax Act of India contains Section 80C, which lists several investments and expenses not subject to income tax. It permits a maximum annual deduction from an investor's taxable income of INR 1.5 lakh. Currently, this programme provides tax exemption for annual premiums of up to 10% of the entire value insured of the insurance policy. Before April 1, 2012, premiums up to 20% (of the total guaranteed) were eligible for tax exemption under Section 80C deduction.
Tax Benefits Under Section 80CCC
The amount spent on a new insurance purchase or payments made toward the renewal or continuation of an existing policy are included in the Section 80CCC exemption limit. The insurance for which the money was paid must offer a pension or a periodic annuity to qualify for this exemption. When read in conjunction with Sections 80C and 80CCD(1), Section 80CCC places a cap on the total exemption amount at INR 1,50,000 per year.
Tax Benefits Under Section 10(10A)
A portion of your Pension Accumulation Plan's money may be commuted if you have one. Pension commutation refers to taking a portion of it as a lump payment. Your pension's commuted value is free from taxes under Section 10(10A). Simply put, you receive tax benefits on the amount you are permitted to take, which is 60% of the maturity amount.
Tax Benefits Under Section 10(10D)
The Income Tax Act's Section 10 (10D) contains regulations specific to tax deductions on claims, such as maturity and death benefits, which include all kinds of bonuses from life insurance policies. All forms of life insurance are eligible for tax deductions under this, and the sum claimed has no upper limit.
Related Article: Tax Benefits of Life Insurance Policy - You Need to Know
Terms and Conditions
- The premium paid for any one year throughout a life insurance policy purchased between April 1, 2003, and March 31, 2012, may not exceed 20% of the sum guaranteed.
- The premium paid for life insurance plans bought after April 1, 2012, can be at most 10% of the amount guaranteed.
- All claims, including those for maturity benefits, death benefits, and bonuses, are not deductible from income.
Tax Benefits Under Section 10(10DD)
According to Section 10 (10D) of the IT Act, 1961, a person may benefit from the tax-exempt status on the lump amount promised and accumulated premium (if any) obtained through their term life insurance policy claim, which is the maturity or death benefit. This exemption is available for a variety of life insurance claims and also applies to payments from unit-linked insurance plans that, at maturity or in the event of an early withdrawal, have an aggregate premium of less than INR 2.5L in a fiscal year.
Income Tax Slabs for FY 21-22
Here are the latest tax slabs introduced by the government of India.
| Income Tax Slab | New Regime Income Tax Slab Rates FY 2021-22 |
| (Applicable for All Individuals & HUF) | |
| Rs 0.0 – Rs 2.5 lakh | NIL |
| Rs 2.5 lakh – Rs 3.00 lakh | 5% (tax rebate u/s 87a is available) |
| Rs 3.00 lakh – Rs 5.00 lakh | |
| Rs 5.00 lakh- Rs 7.5 lakh | 10% |
| Rs 7.5 lakh – Rs 10.00 lakh | 15% |
| Rs 10.00 lakhs – Rs 12.50 lakh | 20% |
| Rs 12.5 lakhs – Rs 15.00 lakh | 25% |
| > Rs 15 lakh | 30% |
Final Thoughts
Besides keeping your family financially protected, buying a life insurance plan can help you save on taxes. It is a great product to keep you financially safe and sound. If you are looking for a life insurance plan for your family, you can buy it online. Buying life insurance online is a simple and hassle-free process, saving time.