We are already in first week of last month of the year and it is this time of the year when we begin tax planning, especially after receiving reminders from HR and finance teams to produce the proof for tax benefits. It is this time of the year when we start taking decisions on claiming tax deductions for the current financial year.
While calculating the amount of claims available on the regular items of deductions, you would have already considered PF contributions and principal component of repayment in your home loan EMI etc. under Section 80-C. It is during this time of the year that people generally buy either life insurance or health insurance for the purpose of saving tax. No wonder majorities of life insurance policies are purchased on tax considerations only and that too in the last quarter of the financial year.
Even if you are self-employed, you would normally plan your tax saving during the last quarter of the year.
In this article I will discuss the aspects of tax treatment of Life Insurance Premium as well as tax treatment of money received from the Insurance company. Since implementation of DTC in the near future is doubtful, I have deliberately dropped the discussion on the same.
Quantum of Deductions for payment of premium:
Under the present provisions of Section 80 C, deduction in respect of life insurance premium paid is available up to a maximum of Rs. 1 lac. This deduction is available with other eligible items like tuition fee for your child, EPF, NSC, ELSS, repayment of principal amount of home loans etc. This deduction is available for premium paid for life insurance polices on the life of yourself, your spouse or your child. Please note that the child may be an adult or a minor or even married, this particular aspect can be used for tax planning.
In the case of senior citizens, normally they do not have much to claim, which qualifies under Section 80C and thus the limit of Rs. 1 lac in majority of the cases does not get fully utilized. In such cases they can pay the life insurance premium for their earning and grown up sons or daughters. This is because in case of the grown up sons and daughters, the limit of Rs. 1 lac, in majority of the cases is already used up by school fees and repayment of home loans and thus life insurance premium cannot be claimed under Section 80C. Financial dependence of your son or daughter on parent is not required for claiming tax benefits on insurance premiums by parents.
One more aspect about claiming tax benefit for life insurance premium which is not generally known to us is that it is not necessary that the premium should be paid by the same person year after year. This can be paid and claimed by different person as long as the same is paid to keep the life insurance policies in force on the life of persons specified in Section 80C. Thus shortfall in parent’s accounts can be filled from surplus of the earning and grown up children’s account from time to time.
One more thing worth noting is that there is no restriction on the number of children in respect of whom you can claim this deduction unlike for tuition fee where the deduction can only be claimed for two children.
Restrictions on Life Cover required for claming the deduction:
As per Section 80 C the quantum of premium which can be claimed is restricted in relation to the amount of the sum assured. So as per the provisions which have become applicable from 1st April 2012, any premium paid in excess of 10% of the sum assured shall not be allowed under Section 80 C. Earlier this limit was 20% of the sum assured. For this purpose the sum assured means the minimum amount which the insurance company has agreed to pay in the event of the death. This amount will not include any bonus payable on this policy. Moreover any premium to be refunded shall also not be considered while calculating the sum assured. Here only the excess shall not be eligible for deduction but within the specified limit you can claim the deduction under Section 80C.
Restriction on continuance of the Life Insurance Policy
In order to ensure that the deductions claimed in respect of premium paid earlier is not withdrawn in subsequently you are required to continue to keep the life insurance policy alive for a certain number of years. In case of a single premium policy, you can not terminate the policy within two years from the date of commencement of the Life insurance Policy. In case of any other life insurance policy, if you do not pay the insurance premium for two years in respect of that policy the benefits granted earlier shall be reversed and the same shall be added to your income.
Tax treatment of money received from Insurance Company
Generally people perceive that all moneys received from Insurance Companies are exempt. This is not true. Section 10(10) provides for exemption for money received from insurance company in respect of insurance policy. First amount received in respect of all Key man Insurance policies are taxable. Secondly money received on death in respect of all the life insurance policies are exempt except those issued as key man’s insurance policy.
In respect of money received from Insurance Company otherwise i.e. other than in the event of death on in respect of life insurance policies issued prior to 1st April 2003, will also be exempt from tax. However in respect of life insurance polices issued on or after 1st April 2003 but before 31st March 2012, money received from insurance company, otherwise than on death, shall become taxable if premium payable in respect of this policy exceeded 20% of the sum assured in any of the year. However in respect of policies issued after 31st March 2012, the same will become taxable in the hands of recipient if the premium in respect of such policies exceeded 10% of the sum assured in any year. Please note if the premium exceeds the specified threshold in any of the premium paying term whole of the money received from insurance company shall become taxable in the year of receipt. So be careful while buying any fresh life insurance policy.
In addition to above any money received in case of life insurance policy purchased for maintenance of physically disabled person under Section 80DD and if such person dies before the proposer, the money received by the proposer shall also be taxable.
I hope the above discussion makes it clear that you should take into account various factors before you buy any life insurance policy so that the premium paid is allowed and the money received in respect of such insurance policy is does not become taxable.