By Amit Gupta
Premiums paid to insure your life or that of your spouse or children are eligible for deduction under Section 80C of the Income Tax Act. This is valid whether your child is dependent or independent, minor or principal, married or unmarried. Both an individual and a Hindu Undivided Family (HUF) can claim this deduction under Section 80C.
There are only two requirements for this. First, the insurer must be approved by the Insurance Regulatory and Development Authority of India (Irdai). And second, the premium paid should not surpass 10% of the sum assured, where the policy is issued after April 1, 2012. For policies issued before April 1, 2012, to claim this deduction, the paid insurance premium should not cross 20% of the sum assured. If life insurance is covering the life of a person with a disability referred under Section 80U or illness referred under Section 80DDB, then premiums paid are eligible for deduction under Section 80C if it doesn’t surpass 15% of the sum assured.
Tax exemption on maturity amount
When the premium does not cross 10% of sum assured for policies issued after April 1, 2012, and 20% of sum assured for policies issued before April 1, 2012, the amount received on maturity of a life insurance policy or as a bonus is fully exempt from income tax under Section 10(10D).
It also includes policies taken after April 1, 2013 on the life of a person with disability or disease specified under Sections 80U and 80DDB respectively, where the received amount after maturity is tax-free if the premium paid doesn’t exceed 15% of the sum assured under the policy to the survivor.
Tax liability of single premium policies
Let’s take an example to understand taxability. Suresh has a policy with a maturity value of Rs 1,10,000. He paid a premium of Rs 45,000 on September 16, 2013 which is more than 10% of the sum assured. Thus insurance maturity earnings are taxable, and not eligible for any exemption under Section 10(10D). On maturity, Suresh surrenders it, and since the maturity payout exceeds Rs 1 lakh, the insurance company is liable to deduct tax at 5% of the income on maturity. Here TDS will be Rs 3,250 (5% of 1,10,000-45,000 ) and net income to Suresh will be Rs 61,750.
Suresh has to now mention this maturity income under the head ‘Income from other sources’ while filing his Income Tax Return. He can also claim credit for TDS against his tax liability as defined at the time of filing his income return.
LIFE & LIABILITY
*If premium does not cross 10% of sum assured, maturity proceeds are tax-free and premiums are eligible for tax deduction under Section 80C
* For life cover of person with an illness/ disability referred under Section 80DDB/ 80U, premium paid is eligible for deduction if it doesn’t surpass 15% of sum assured
The writer is MD, SAG Infotech