Tax Benefits u/s 80D: How to divide health insurance premium to claim deduction for more than 1 year

If an insurance company issues 80D Certificate dividing premium of a 2-year health insurance policy in three financial years, how would you show it in your ITR?

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Section 80D provides that the single premium paid should be divided over the years for which the benefit of health insurance is available.

While filing the Income Tax Return (ITR), Arup Sahay (name changed) got confused while putting the amount of health insurance premium u/s 80D. He had paid premium of over Rs 59,000 on the family floater policy for two years on January 2020, but the insurance company, in the 80D Certificate for the purpose of claiming tax benefits u/s 80D, had divided the premium in three Financial Years (FY) – FY 2019-20, FY 2020-21 and FY 2021-22 – as the 2-year policy overlaps the three FYs.

Arup was, however, not amused, as, according to the 80D Certificate, he can claim tax benefit of less than Rs 20,000 in case the premium is divided in three FYs, while he can claim the full benefit of Rs 25,000 if the premium is divided in the two benefit years of the policy.

“Section 80D provides that the single premium paid should be divided over the years for which the benefit of health insurance is available. As such, the premium would be divided over three years as technically three financial years are covered,” said Dr. Suresh Surana, Founder, RSM India.

Explaining the rule of dividing premium of a multi-year health insurance policy, Dr. Surana said, “Finance Act 2018 provided the taxpayer to avail the benefit of the premium paid for multi year health policies to be distributed pro-rata over the policy term. As per the rule, in a case where premium for health insurance for more than a year has been paid in one year (i.e. single premium/ lump sum premium paid for multiple years), the deduction shall be allowed proportionately over the years for which the benefit of health insurance is available.”

“As per the provisions of this section, there shall be allowed for each of the relevant financial year, a deduction equal to the appropriate fraction of the amount. “Appropriate fraction” means the fraction, the numerator of which is one and the denominator of which is the total number of relevant financial years covered under insurance,” he added.

“For instance, if a single premium of Rs 30,000 is paid for a 2 year policy, then the taxpayer can avail a deduction u/s 80D of Rs 15,000 per year. However, such amount of Rs 15,000 would be again restricted to the maximum amount of deduction which can be claimed u/s 80D of the Income Tax Act, 1961,” Dr. Surana explained.

As the benefit of the health insurance policy of Arup was of two years and the next premium will become due again in the third FY mentioned in the 80D Certificate, he requested the insurance company to reissue the Certificate, so that he may claim the tax benefits in the two benefit years, instead of the three FYs without any confusion.

On his request, the insurance company reissued the 80D Certificate stating the total premium of the 2-year policy with the start and end date of the benefit period, which removed the confusion and Arup was able to claim the maximum tax benefit of Rs 25,000 u/s 80D on the 2-year policy for the FY 2019-20.

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First published on: 04-08-2020 at 20:18 IST