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Tax Benefits of Life Insurance Plans



Life is uncertain. A game of chance. What is there today is not there tomorrow. You need to be there for your family and if you are not there your term life insurance plan needs to be there.

What is a term life plan?

You have to pay a premium (a fixed sum of money) to the Insurer. You have to pay the premium for a fixed time period called the term of the policy. If you (policyholder) die before the term of the policy : Your family (spouse and children) get the sum assured (a lump sum payment) depending on the premium you pay.

If you (policyholder) survive the term of the policy : You and your family do not get any money. A term life plan is a great buy if you are newly married or just starting a family. This is a pure insurance plan with no survival benefits. This means you pay a very low premium for that term life plan. Yes…you also get tax benefits.....The premiums you pay for that term life plan are deducted from your taxable salary up to INR 1.5 Lakhs per year under Section 80 C of the income tax act. The money your family (spouse and children) receive on your (policyholders) death is tax free under Section 10 10(d) of the income tax act.

What about the endowment life plan?

In an endowment life plan you enjoy twin benefits :



You pay a premium for a fixed time period and your life is insured for a sum of money depending on the premium you pay. If you (policyholder) die soon after availing the policy your family gets only the sum assured. If you survive the term of the policy you and your family enjoy the maturity benefits.

Maturity benefit = Sum assured + Bonus The bonus paid on the endowment life plan only accumulates with time. Simple: Longer you (policyholder) survive …higher are the bonuses you receive from the endowment life plan.

Tax benefits on your endowment life plan

The premiums you pay for the endowment life plan are deducted from your taxable salary up to INR 1.5 Lakhs per year under Section 80 C of the income tax act.

The money your family (spouse and children) receive on your (policyholders) death is tax free under Section 10 10(d) of the income tax act.

Can your returns from an endowment life plan be taxed?

In case your life insurance plan has been issued on or after 1st April 2012 the premiums you pay for this policy (endowment life plan) in any year should not exceed 10% of the sum assured.
The sum assured is only the minimum assured amount and does not include premiums to be returned and the bonuses accrued on the endowment life policy.

Let us understand this through an example :

You pay an annual premium of INR 10,000 on the endowment life plan for a sum assured of INR 1 lakh. This is within the stipulated limits where the premium paid for the endowment life plan in any financial year should not exceed 10% of the sum assured. You avail tax deduction under Section 80 C. What if you pay a premium of INR 10,000 for a sum assured of INR 90,000.The premiums you pay exceeds 10% of the sum assured of the endowment life plan.

The sum assured is INR 90,000 and you get only (10% of INR 90,000) which is INR 9,000 as a deduction under Section 80 C.

The death benefit your family receives from the endowment life plan is tax free under Section 10 (10d) of the income tax act even if the premiums paid in any year exceeds 10% of the sum assured on the endowment life plan.

What about the maturity benefits you get from an endowment life plan?

If you pay a premium for your endowment life policy which does not exceed 10% of the sum assured then the maturity benefits you get from your endowment life plan is tax free under Section 10 (10d). If the premiums you pay for the endowment life plan in any financial year exceed 10% of the sum assured then the maturity benefits you get on the maturity of the endowment life plan are taxed as per the income tax slab you fall under. (Marginal rate of taxation).

However since no TDS (Tax deducted at source) was charged it was possible for you to escape taxation.
From October 1st 2014 the Insurer deducts TDS of 2% from the maturity benefits of the endowment life policy if the premium you pay in any financial year is more than 10% of the sum assured. Now there is no escape...
You have learnt from this article how you get tax benefits if you avail a life insurance plan. If you want to have your cake and eat it too then you need to study taxation on your life insurance plan.

Insurance
Term Insurance