Insurance is a security, which an individual provides himself and his family to withstand future events that could adversely affect his financial situation. Apart from that, insurance has also evolved as an important tax-saving instrument.
Life insurance
An individual can claim deduction for the life insurance premiums paid by him/her during a financial year under Section 80C of the Income Tax Act, 1961. If the premium paid in a financial year is more than 20% of the actual capital sum assured (SA) , then the deduction is restricted to up to 20% of the SA. Also, the maximum deduction available under the Section is R1 lakh.
For an individual, this deduction is available in respect of the premium paid for self, spouse or child. In case of an Hindu Undivided Family (HUF), the deduction is available in respect of the premium paid for any member thereof. However, the above deduction is reversed if the policy is terminated or ceases to be in force within two years of its commencement.
The amount received on maturity of a life insurance policy, including any bonus, is exempt under Section 10(10D). The claim proceeds received from the insurer by the dependent or the nominees of the policy holder after his death are also not taxable under the Act. However, any sum received under a Keyman insurance policy is taxable. Any sum received under an insurance policy issued on or after April 1, 2003, in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the SA is taxable, unless received on death of the person.
Medical insurance
Apart from providing medical cover, premiums paid for medical insurance are eligible for tax benefits. A deduction under Section 80 D of the Act is available to individuals and HUFs in respect of premium paid towards medical insurance for self and family, by any mode other than cash.
An individual can claim deduction for medical insurance premium paid for self, spouse and dependent children, subject to a maximum of R15,000 per annum. An additional deduction, subject to a maximum of R15,000 per annum, is available for premium paid for one?s parents.
Where the premium is paid for senior citizens, the maximum limit is enhanced to R20,000 per annum.
Note that the Direct Taxes Code (DTC) proposes to create a separate basket of deductions for premiums paid towards life insurance, health insurance and tuition. The overall limit for these deductions is proposed at R50,000 per financial year. Also, the limit of 20% of SA with respect to life insurance policies is proposed to be reduced to 5%of the SA.
The writer is executive director(tax), KPMG; with inputs from Neetika Khosla