Life insurance provides financial stability to individuals and families. While the primary aim of life insurance is protection, it is also critical to understand how life insurance contracts are taxed. Taxation laws and perks linked with life insurance might impact potential policyholders’ decision-making process.
This article will examine the tax repercussions of life insurance policies in addition to a number of its features and advantages.
Section 10(10D): Tax exemption on maturity amount
One of the most significant advantages of life insurance plans is the tax exemption on the policyholder’s maturity amount.Any cash received as a death benefit or maturity benefit from a life insurance policy is totally tax-free, according to Section 10(10D) of the Income Tax Act of 1961. This implies that the insured money, as well as any bonuses or returns, are completely tax-free for the recipient or policyholder.
Remember that this exemption only applies to plans issued after April 1, 2012, and only if the premium paid is less than 10% of the total guaranteed amount. To qualify for the tax exemption, the premium on insurance issued before to this date should not exceed 20% of the total guaranteed.
Section 80C: Tax deductions on premiums
Section 80C of the Income Tax Act allows for tax deductions on premiums paid for life insurance contracts. In a fiscal year, policyholders can deduct up to INR 1.5 lakh from their total taxable income. This deduction applies to insurance purchased for the self, spouse, and dependent children.
It is vital to remember that the entire amount of Section 80C deductions, which includes other investment alternatives such as Public Provident Fund (PPF), Employee Provident Fund (EPF), and National Savings Certificates (NSC), among others, cannot exceed INR 1.5 lakh.
Tax on partial withdrawals
Some life insurance policies, such as unit-linked insurance plans (ULIPs), offer the flexibility of partial withdrawals during the policy term.As long as the insurance is remained in force for at least five years, the amount taken by the policyholder in the event of a partial withdrawal is tax-free. However, if the insurance is surrendered within five years, the tax treatment is comparable to the already stated surrender of the policy before two years.
Taxation of annuities
Life insurance policies that provide annuities offer a regular income stream to the policyholder after retirement. The annuity income received is taxed as per the individual’s applicable income tax slab.
Taxation of surrender value
In the case of a financial emergency or a change in circumstances, policyholders may choose to surrender their life insurance policies before their maturity date. The surrender value is the amount paid by the insurance company to the policyholder when the policy is surrendered.
The date of the insurance surrender affects the taxation of the surrender value.For plans issued after April 1, 2017, the surrender value is added to the policyholder’s income and taxed at the policyholder’s marginal tax rate if the policy is surrendered before the two-year term expires.
However, if you surrender the policy after two years, the surrender value is tax-free under Section 10(10D).Taxation of death benefits
If the policyholder dies within the policy term, the death benefit paid by the nominee or beneficiary is likewise tax-free under Income Tax Act Section 10(10D). The whole money promised, as well as any collected bonuses, is tax-free. This tax exemption guarantees that family members enjoy the full financial protection offered by the policy without incurring any tax liability.
Taxation of maturity amount for single premium policies
The tax treatment of single premium life insurance policies differs somewhat since the premium is paid in a lump sum at the start of the policy term. Section 10(10D) exempts the maturity amount received from single premium insurance from tax if the premium paid does not exceed 10% of the sum guaranteed.
Conclusion
Understanding the taxation aspects of life insurance policies is essential for every policyholder. The tax benefits, including exemptions on maturity amount and deductions on premiums, make life insurance an attractive financial instrument for securing one’s future while availing tax benefits.
However, it is crucial to adhere to the rules and circumstances outlined in the Income Tax Act in order to fully enjoy these benefits. Always get personalized advice from a tax adviser based on your individual financial position.
(The author, Rakesh Goyal, is the director of Probus Insurance Broker)
