Life insurance products are a great way to protect your family from any eventualities. However, apart from serving as a protective shield for you and your family, life insurance is also a beneficial tax(*) saving instrument. Even a term insurance policy offering a pure risk cover comes with tax(*) benefits which is the reason why most policyholders choose term insurance for tax(*) savings.
In addition to not knowing the many benefits of life insurance policies, many people are also not aware of the tax(*) benefits of investing in a life insurance plan. On the other hand, some people choose life insurance policies specifically as tax(*) saving options. But it is always better to benefit from the tax(*) savings while also fully understanding and enjoying the life cover and other benefits offered by a life insurance plan.
What are the Tax(*) Benefits of Life Insurance?
Life insurance policies are among the tax(*) free instruments mentioned under Section 80C of the Income Tax Act, 1961, thereby allowing policyholders to claim a deduction on premium payments. Furthermore, Section 10(10D) of the aforementioned legislation provides tax(*) exemption on the death/maturity benefit received from a life insurance policy.
Let's look at how Section 10(10D) of the Income Tax Act, 1961 works.
What is Section 10(10D) of the Income Tax Act?
Under Section 10(10D) of the Income Tax Act, 1961, the sum assured of the life insurance plan along with any applicable bonuses(2) from the policy that are paid out on the death of the policyholder or on the maturity of the policy are eligible for tax(*) exemption. This benefit is also applicable in the case of Unit Linked Insurance Plans (ULIPs), which are market-linked insurance-cum-investment plans.
But when you buy a term life insurance policy for your family that offers only a pure risk cover, only the death benefits are eligible for tax(*) benefits under this section since there are no maturity benefits in term plans unless with the addition of a return of premium rider(#).
In the case of Section 10(10D), there are two scenarios to consider for tax(*) exemption:
Death benefits: Under a life insurance plan, if the policyholder passes away during the tenure of the policy, the sum assured, as determined at the commencement of the policy, is paid out to the beneficiaries the individual. This death benefit is tax(*)-exempt under Section 10(10D).
Maturity benefits: Under a life insurance policy, if the policyholder outlives or survives the policy term, they receive the maturity proceeds including any applicable bonuses(2). These maturity proceeds qualify for a tax(*) exemption under Section 10(10D).
How does Section 10(10D) Apply to Life Insurance Payouts?
As per Section 10(10D) of the Income Tax Act, 1961, the sum assured is paid out to you or your beneficiary as one of the following benefits.
a death benefit
a maturity benefit
a surrender benefit
While the sum assured of a life insurance policy is exempt from tax(*) under Section 10(10D), there are some terms and conditions that need to be taken into consideration. These terms, however, do not apply to the death benefits that are paid out in the event of your, the policyholder’s, unfortunate demise. This is beneficial when you have to choose from various life insurance plans for your family.
- If the premium payment for any life insurance policy exceeds 20% of the sum assured for a policy purchased after April 01, 2003, but on or before March 31, 2012, then the proceeds of the policy will be taxable in the hands of the policyholder.
However, it is important that the sum assured should not include any bonus(2) amount or any premium that needs to be paid back to the policyholder. Hence when you opt for a term insurance plan with a return of premium(+) option, the payouts will be rendered taxable.
While you can enjoy the benefits of the lump sum payouts, regular income, return of premium on term plans or assured returns of our Tata AIA life insurance plans, this exception is something you should bear in mind.
If you purchase a life insurance policy on or after April 01, 2012, the same conditions as stated above will apply but only if the premium payments exceed 10% of the sum assured under the policy.
As a policyholder, if you are ailing from a disability as specified under Section 80U or suffer from a critical illness as specified under Section 80DDB of the Income Tax Act, 1961, the limit of the premium payments as mentioned above will be increased to 15%.
However, this is applicable for policies that are issued after April 01, 2013. More importantly, you can avail of this benefit only if the said disability or critical illness comes under the particular sections of the Income Tax Act, 1961.
Keeping in consideration the year in which the policy was purchased if the premium amount goes above the 10%, 15%, or 20% limit of the sum assured, the benefits will be taxable for you. However, as has been mentioned above, it is only the death benefits that will not be taxed even if the premium amount exceeds the stipulated limits.
What Else Should You Know About the Taxability of Your Life Insurance Payouts?
There are two more key points to remember when it comes to the tax(*) rules under Section 10(10D):
Firstly, if any payout from a life insurance policy is not eligible for tax(*) deductions under the Keyman Insurance Policy, then the benefits of Section 10(10D) will be applicable for said payouts. It is important to note that a Keyman Insurance Policy is a policy wherein an employer is the proposer of the insurance policy and also pays the premiums for their employees; however, the life insured is the employee of the former and the benefits (in the event of a claim), will be paid out to the employer.
Secondly, if the maturity benefits of your policy do not qualify for a tax(*) exemption under Section 10(10D), then a 5% TDS (Tax Deducted at Source) will be calculated on incremental amount i.e. after reducing the premium paid from the total amount payable on maturity provided PAN details are updated. However, if you do not submit the PAN details, a TDS of 20% will be applicable on the maturity benefits. The TDS rate for NRI policy holder is governed by section 195 at 30% plus applicable surcharge and cess.
Conclusion
As a taxpayer, you should not aim to use a life insurance policy primarily as a tax-saving tool; however, it is important to understand how you can use the policy to provide protection to your family while enjoying its tax-saving benefits.
L&C/Advt/2021/Nov/2002
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Disclaimers:
Insurance cover is available under the product.
The products are underwritten by Tata AIA Life Insurance Company Ltd.
The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
(*) Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you. (#)Riders are not mandatory and are available for a nominal extra cost. For more details on the benefits, premiums and exclusions under the riders please refer to the Rider Brochure or contact our Insurance Advisor or visit our nearest branch office.
(2)These bonuses are not guaranteed in nature. The Company may declare Cash Bonus rate annually in advance. The Cash Bonuses if declared, will be applicable provided all due premiums have been paid.
(+)Return of premium shall be the return of Total Premiums Paid (excluding loading for modal premiums and discount) by the policyholder and shall be payable at the end of the Income Period
IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER. THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/ WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.
Past performance is not indicative of future performance.
All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.
Please make your own independent decision after consulting your financial or other professional advisor.
Tata AIA Life Insurance Company Limited (IRDAI Regn. No.110 • CIN: U66010MH2000PLC128403). Registered & Corporate Office: 14th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400013. Trade logo displayed above belongs to Tata Sons Ltd and AIA Group Ltd. and is used by Tata AIA Life Insurance Company Ltd under a license. For any information including cancellation, claims and complaints, please contact our Insurance Advisor / Intermediary or visit Tata AIA Life’s nearest branch office or call 1-860-266-9966 (local charges apply) or write to us at customercare@tataaia.com. Visit us at: www.tataaia.com.
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