Life Insurance Tax Benefits Under Section 80C & 10(10D)

Section 80C allows deductions from taxable income for insurance premiums paid to insure your own life, the life of your spouse, or the life of your child, subject to the conditions specified therein. The dedu… under section 80C is allowed regardless of whether your child is dependent or independent, minor or major, married or single. This deduction is available to both individuals and HUFs under Section 80C.

A Section 80C deduction is available for premiums paid to any insurer that has been approved by the Insurance Regulatory and Development Authority of India (IRDAI). However, if the policy was issued after April 1, 2012, the yearly premium paid cannot exceed 10% of the total sum assured to claim a dedu… under Section 80C. For policies issued before April 1, 2012, the yearly premium paid must not exceed 20% of the sum assured.

Furthermore, it is important to note that for a policy issued after April 1, 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB, the premium must not exceed 15% of the sum assured in order to claim the deduction under Section 80C. The term "sum assured" simply refers to the minimum amount guaranteed to the survivor under the policy. This figure excludes any premiums that have been agreed to be returned, as well as any incentive payments made under the policy.

However, the benefit of availing income tax deductions under section 80C is only applicable if you file your returns under the Old Tax Regime. If you opt for the New Tax Regime, this deduction cannot be claimed⁵.

Exemption Under Section 10(10D) of the Income Tax Act, 1961 on Maturity Amount

Section 10(10D) of the Income Tax Act 1961 is applicable for benefits, including maturity benefits received under the insurance plan. The death benefit is exempted from any Income Tax in the hands of the nominee, irrespective of the satisfaction of Section 10(10D) conditions.

However, in the case of life insurance policy whose premium is greater than 10% or 20% of the sum assured, depending on the case, is completely taxed.
The insurance policies purchased on or after 1 April 2023 with an aggregate premium exceeding Rs. 5 lakhs annually will not get any tax exemption under this section.

However, suppose the total premium of all these policies issued on or after 1 April 2023 exceeds Rs. 5 lakhs in a year, then only those specific plans will qualify for an exemption under Section 10 (10D), wherein the total premium paid is less than the mentioned limit.

Tax Exemption for ULIP Plans Under Section 10(10D) of the Income Tax Act, 1961

In the case of ULIPs bought on or after 1st February 2021, the total maturity benefit amount would be completely exempted from Income Tax if the total annualised premium is up to Rs. 2.5 lakhs. If the premium amount is more than Rs.2.5 lakhs, the gains from all such policies would be taxable as capital gain.

The applicable Income Tax would be as follows –

• Capital gains up to Rs.1.25 lakhs are tax-free. If the capital gains exceed Rs.1.25 lakh, the excess is taxed at 12.5%. In ULIPs, there is lock in period of 5 years and hence, the gains would generally be long term only .
• However, if you redeem within the first year, the tax rate will be 20% on the total returns earned from the policy. This would be considered a short-term capital gain.
• If you pay any top-up or rider premiums in any of the policy years, the total premium calculated for the purpose of taxation of the maturity proceeds would also include the total amount of the top-up or rider premium paid.
  If the top-up or rider premium amount along with the basic premium exceeds Rs.2.5 lakhs in any of the policy years, the gain from such a policy would be taxable as capital gain.

However, the taxation of ULIP policies wherein the total annualised premium is more than Rs.2.5 lakhs applies only to those policies issued on or after 1 February 2021. If you had taken the policy before this date, the entire maturity benefit would be completely exempted from Income Tax even if the annualised premium amount is more than Rs.2.5 lakhs per annum, provided the policy meets the other criteria mentioned in Section 10(10D) of the Act.

Furthermore, under Section 10(10D) of the Act, death benefits are completely tax-free in the hands of the nominee.

Tax Rules on Policy Surrender and Their Implications

When you surrender a life insurance policy before its tenure ends, the surrender value is taxable under these conditions:

• For traditional policies, the surrender value is exempt only if you have paid premiums for at least two years. 
• For ULIPs, if you surrender before the mandatory 5-year lock-in period, the entire surrender value is taxable.
• Any tax benefits for life insurance claimed earlier under Section 80C (if you have opted for the old tax regime) may be reversed in the year of surrender.

Key Takeaway

1. Premiums paid qualify for tax benefits on life insurance under Section 80C (under the old tax regime).
2. The maturity or death benefits received are tax-free under Section 10(10D) subject to conditions mentioned therein.
3. Surrendering policy before the minimum lock-in period can make the payout taxable, and previously claimed tax benefits on life insurance under Section 80C may be reversed.

Conclusion

Life insurance policies provide policyholders and their loved ones with the assurance that if a person dies, financial issues will be mitigated. Understanding how the process works, from purchasing life insurance to submitting a claim and receiving a payout, will help you feel more confident in your decision to buy coverage.