Life Insurance Tax Benefits in India 2023

Investing in life insurance is an essential part of creating a sound financial plan for the future, as it can provide financial security for your loved ones. It is like putting money away in a savings account - which may seem like an expense today, but it provides a strong foundation for tomorrow. By investing in a life insurance policy, you not only secure your and your family's future but also can enjoy the added benefit of tax savings - ensuring maximum return on the investment.

In this article, we'll discuss all the important details related to the tax benefits offered by life insurance. Let's get started!
 

Life Insurance Tax Benefits

In India, the Income Tax Act, 1961 lays down the rules for income tax payments by earning individuals. It also lays down several laws and clauses that help you save your taxes - by way of exemptions and deductions.

Tax benefits are available for several types of life insurance policies, including Term Insurance, Whole Life Insurance, Child Plan, Guaranteed Income Plan, Endowment Plan, Unit-Linked Insurance Plan, Annuity Plan, Pension Accumulation Plan, etc.

The Act provides a list of tax benefits under Section 80C, Section 10(10D), and Section 10(10A) for income taxpayers.

Section 80C of the Income Tax Act, 1961

According to Section 80C of the Income Tax Act, 1961, you can claim a tax deduction for life insurance premiums you pay for yourself, your spouse, your parents, or your child. You can claim a deduction of up to a maximum of Rs. 1.5 lakhs.

Did you know that you can get tax deductions for the premiums you pay for any riders as well? Riders are optional add-ons that can be added to your base life insurance policy at a certain extra cost to enhance your coverage. You can get a tax deduction under Section 80C for all other riders except those related to health, such as critical illness riders, hospital care riders, surgical care riders, etc. You can claim a deduction of up to Rs. 1.5 lakhs on your annual rider premiums.

1. Conditions For Claiming Tax Benefits Under Section 80C

   The following conditions must be met in order to qualify for a tax deduction under Section 80C.

   • Life insurance policies issued before 1st April 2012 must have a premium of no more than 20% of the sum assured.

   • Life insurance policies issued after 1st April 2012 must have a premium of no more than 10% of the sum assured.

2. Things To Keep In Mind While Claiming Tax Deduction Under Sections 80C

   • Premiums paid in full, including taxes, qualify for a tax deduction under Section 80C. However, if you pay the premium in cash, you are not eligible for a tax deduction.

   • You must pay premiums to an insurance company that is regulated and authorised by IRDAI.

   • In the case of group life insurance, you can only claim a tax deduction if you are paying either a partial or full premium.

Section 10(10D) of the Income Tax Act, 1961

Life insurance claim amounts and any bonuses received at the death of the insured, surrender of policy (discontinuing the policy during the middle of the policy period), or at maturity of the policy are exempted from tax.

1. Exemption Conditions Under Section 10(10D)

   In order to qualify for the tax benefits under Section 10(10D), the following conditions must be met -

   • Life insurance policies issued before April 1, 2012 must not have a premium exceeding 20% of the sum assured.

   • Life insurance policies issued after April 1, 2012 must not have a premium exceeding 10% of the sum assured.

2. Conditions Associated With Tax Benefits For Disabled People Under Section 10(10D)

   A person with disabilities or suffering from an ailment as defined in Section 80U or Section 80DDB of the Income Tax Act may be eligible to claim tax benefits under Section 10(10D) if the following conditions are met:

   • A life insurance policy issued before 1st April 2013 should not have a premium exceeding 10% of the sum assured.

   • A life insurance policy issued after 1st April 2013 should not have a premium exceeding 15% of the sum assured.

3. Conditions Under Section 10(10D) For Maturity Benefit

   Section 10(10D) allows you to claim tax benefits on the maturity benefit you receive when your policy matures, only if -

   • It is not received from an employer-sponsored group insurance policy

   • It is not received under a keyman insurance policy.

   • It is not an annuity or pension policy payout.

   • It is the death benefit received upon the death of the insured.

   • A policy purchased between 1st April, 2003 and 31st March, 2012 does not have premiums that exceed 20% of the sum assured during any particular year.

   • A policy purchased after 1st April 2012 does not have premiums that exceed 10% of the sum assured.

4. Tax Benefits On Surrendering A Life Insurance Policy

   You may want to discontinue a policy in the middle of the policy term for a variety of reasons - you no longer need the policy, you’ve found another policy with impressive features, etc. This is called surrendering the policy.

   You can avail of tax deductions on surrendered life insurance policies only if you meet certain conditions.

   1. Conditions depending on the policy type

   • Single-premium life insurance policy

     You need to hold the policy for at least 2 years.

   • Unit-linked insurance plan

     You can surrender the policy only after 5 years from the policy inception.

   • Endowment plan or a Guaranteed income plan (traditional policies)

     You need to pay premiums on time for the first 2 policy years.

   2. Conditions depending on the life insurance issuance date

   • Between 1st April, 2003 to 31st March, 2012

     Sum assured must be at least 5 times the annual premium.

   • On or After 1st April, 2012

     Sum assured must be at least 10 times the annual premium.

   • On or After 1st April, 2013

     The sum assured must be at least 6.67 times the annual premium amount, or you are disabled or suffer from any ailment according to Section 80U of the Income Tax Act.

   No conditions are imposed on policies issued before 31st March, 2003.

   Note: You will not receive a tax exemption under Section 10(10D) if you don't fulfil any of the aforementioned conditions when surrendering your policy. The income will be taxed according to the existing tax bracket since it will be regarded as 'income from other sources'.
    

Section 10(10A) of the Income Tax Act, 1961

If you own a pension accumulation plan, you are eligible to receive tax benefits under Section 10(10A) of the Act.

A pension accumulation plan is a life insurance plan under which you make regular payments when you earn to accrue a nice savings fund for your retirement life - which is the maturity amount.

But, the IRDAI has limited the usage of this maturity amount. You can -

• Withdraw money and invest 100% of the amount in a single-premium annuity plan under the same insurer.

• Withdraw money and invest half of the amount with the same insurer and the remaining half with another insurer.

• Withdraw 60% of the amount and invest the remaining amount in a single-premium annuity plan. This 60% amount you’re allowed to withdraw and keep is exempt from taxation under Section 10(10A) of the Act.
   

Wrapping Up!

The purpose of life insurance is to provide you with financial protection and security. Although life insurance can serve as an excellent tax-saving tool, it should not be the sole reason to purchase it. You should consider it an added perk. Before you go ahead and invest your money, evaluate all of your choices thoroughly and make sure the policy you choose will truly protect you and your loved ones.