Income Tax Saving Life Insurance Plans

The payment of premiums on life insurance policy offers insurance cover to the policyholder along with other policy benefits. Among those significant benefits of buying a life insurance policy is the “Tax Benefits”offered to the taxpayer under section 80 C of Income Tax Act, 1961. Section 80 C offers deductions available to a taxpayer for paying premiums under the life insurance policy.

The accumulated income from all the heads is termed as “ Gross Total Income” of the taxpayer. To derive the taxable income, the taxpayer has to deduct the deductions allowable under section 80 C to 80 U.However, the aggregate amount of deductions under section 80 C to 80 U cannot be more than Gross Total Income.

Deductions under Section 80 C with respect to Life Insurance:

Section 80 C offers deduction to the taxpayer (either individual or a Hindu Undivided Family (HUF) who can claim deductions for paying the life insurance premium during the year. The total deduction allowed under section 80 C (along with deduction u/s 80CCC & 80CCD) is up to Rs. 1,50,000.

For the individual taxpayer, life insurance policy taken in the name of either the taxpayer or his/her spouse or his/her kids allow deduction up to section 80 C of the Income Tax Act, 1961.

Deduction restriction with respect to Sum Assured:

For policies issued on or before 31st March 2012, Income tax deduction is restricted or capped to 20% of capital sum assured. For policies issued on or after 1st April 2012, Income tax deduction is restricted or capped to 10% of capital sum assured. The deduction limit is 15% for the person suffering from a disability or severe disability referred to in section 80U or suffering from disease or ailment as given in section 80DDB, in case the policy is taken on or after 1st April 2013.

Example: Ram paid a premium of Rs. 8,400 on his life insurance policy issued in April 2011 for Sum assured is Rs. 25,000, the deduction will be restricted to 20% of capital sum assured. 20% of the sum insured will be Rs 5,000. Hence, Ram will be eligible to claim deduction of Rs. 5,000 out of Rs. 8,400.

Minimum Holding Tenure for the Investments:

There is a minimum holding period with respect to the investments to claim deductions under section 80 C. For Life Insurance policy, minimum holding period is 2 years, for unit linked insurance policy (Ulip), the holding period to keep the investments active is for 5 years and for Senior Citizens Saving Scheme and Post Office Time Deposit, it is 5 years.

In case, the life insurance policies as per its categorization (Ulip or traditional) are surrendered or terminated , before the minimum holding period tenure,then in that case the earlier deductions will be treated as income for the previous years.Also, no deduction will be allowed in respect of contribution, payment, etc., made towards such policy, units, etc. (i.e., which is terminated) during the year of termination.

Other Investments under Section 80 C where Tax deduction can be claimed , apart from Life Insurance Policy are:

• Home Loan Payments
• Fixed Deposits
• Public Provident Funds (PPF)
• National Savings Certificates
• Mutual Fund Investments (ELSS)
• Infrastructure Bonds
• Sukanya Samriddhi Account
• Children's Tuition Fee
• Employee's share of PF contribution
• Senior Citizens savings scheme, etc.

Tax exemption under Section 10 (10 D):

Any sum received under a life insurance policy, inclusive of bonus on such policy will be exempted from tax under section 10 (10 D) of Income Tax Act. However, this rule does not apply to following amounts:

• Sum received under Section 80DD(3), or
• A sum received under a Keyman Insurance Policy, or
• Any sum received other than as death benefit under an insurance policy which has been issued on or after April 1 2003 and if the premium payable in any of the years during the term of the policy does not exceed 20% of the sum assured. For insurance policies issued on or after April 01 2012, exemption would be available for policies where the premium payable for any of the years during the term of the policy does not exceed 10% of the actual capital sum assured.

Note: For policies issued on or after 01 April 2013,15% of the actual capital sum assured in case of person with severe disability or specified ailment).