Life insurance aims to help your family lessen the financial burdens in the event of your untimely demise. Hence it is important to understand what is life insurance.

Life insurance is a contract you sign with an insurance provider. The insurance firm receives monthly premium payments from you, the policyholder, in exchange for a gross sum payable upon the insured’s passing (death benefit) and/or upon the expiration of the insurance term (maturity benefit).

Tax Advantages Of Life Insurance

In addition to maturity/death benefits, life insurance contracts qualify for life insurance tax benefits under Sections 80C and 10(10D) of the Income Tax Act of 1961.

Let’s examine the two provisions that have an impact on life insurance taxes:

Article 80 C

Any person, resident or non-resident, may deduct up to Rs. 1.50 lakh annually for life insurance premiums paid under Section 80 C. Along with other qualifying goods like ELSS, PPF, NSC, fixed deposits, college fees paid, house loan repayment, provident fund contribution, etc., this deduction is possible.

Only life insurance premiums up to 10% of the amount assured are deductible under section 80C of the tax code. Any premium paid more than 10% is not eligible for a deduction. However, up to 15% of the insured amount, up to a maximum of INR 1.5 lakh per year, is exempt for some people who are considered handicapped or have a serious illness.

Section 10 (10D). The Income-tax Act’s Section 10 (10D) determines whether the maturity proceeds from your life insurance policy are tax-free. Any sum paid out under the insurance plan, whether it be a death benefit, plan maturity, or other bonuses, is subject to Section 10(10D).

It’s crucial to remember that death benefits are never subject to taxes. Based on the premium paid, maturity benefits (given upon survival for a predetermined amount of time) are occasionally taxed.

According to section 10 (10D), for life insurance policies purchased after April 1, 2012, if the yearly premium paid is greater than 10% of the policy’s sum insured, the maturity proceeds (survival benefits) will be taxed based on your income tax bracket. If not, the money is free of taxes.

The premium for an insurance policy issued between April 1, 2003, and March 31, 2012, should be less than 20% of the insured sum to avoid taxes.

For specific people who fit the following description:

1. Individuals who are disabled or severely incapacitated as defined by Section 80U of the Income Tax Act of 1961.
2. People with the conditions listed in Section 80DDB of the Income Tax Act of 1961.
3. For plans purchased before April 1, 2013, maturity benefits are not subject to taxes if premiums do not exceed 15% of the amount assured.

Criteria For Section 10(10D) Of The Income Tax Act Eligibility

1. Life insurance claim payouts, such as maturity and death benefits, including accrued bonuses, can avail of tax deductions under Section 10(10D).
2. All life insurance claim payouts can avail of tax deductions under Section 10(10D).
3. Thelife insurance tax benefits provided by Section 10(10D) of the Income Tax Act are not subject to any maximum.

Taxation Of ULIPs

If the requirements above are satisfied, gains from unit-linked insurance plans (ULIPs) and single-premium life insurance policies are also subject to section 10(10D) advantages.

To refresh your memory, ULIPs are insurance policies where you pay the premium for a specific number of years (often around five), which the insurer invests for you, and offers a life insurance cover (typically for a sum insured of 10 lakhs). Beyond a holding period (for example, five additional years) following the conclusion of the premium payment term, you will then get a maturity benefit. Consequently, one example of a ULIP is one in which the insurance pays you a lump amount of 10 lakhs after you have paid 1 lakh every year for 5 years. Your beneficiaries will receive an additional death benefit of INR 10 lakhs if you pass away within this time limit.

However, a new regulation for ULIPs was implemented in 2021, and it applies to ULIPs bought on or after February 1, 2021. The law is straightforward: There is no tax exemption on the returns if the annual premium paid for the ULIP exceeds INR 2.5 lakhs.

Also, according to the latest developments in 2023, with the new Tax Regime, you may not get the desired tax benefit. You can go for the old Tax Regime instead.

Any taxable returns are considered capital gains rather than paying income tax. A thorough understanding of what is life insurance is essential.