Life insurance policies are mostly known for providing a financial cushion during medical emergencies. But there are dual benefits of buying a life insurance policy i.e., you can also enjoy tax benefits and exemptions. For instance, as per Section 10(10D) of the Income Tax Act, any claim amount or bonus (if any) received will be completely tax-free irrespective of whether the amount is paid out upon the death of the insured, surrendering the policy or maturity of the policy.
Let’s understand Section 10(10D) with an example.
Let’s say Mr. Agarwal bought a term insurance plan and nominated his son as a beneficiary. Unfortunately, Mr. Agarwal died in a road accident, and his insurer disbursed the death benefit to his son (nominee). Such a payout may seem like an income. However, Section 10(10D) ensures that this amount is not taxed.
Maturity amount received via a one-term premium insurance plan isn’t exempt from tax under Section 10(10D). The amount could be tax-free only if the minimum sum assured is 10x the single premium amount paid.
For policies that don’t come under Section 10(10D), any amount you receive from the insurance policy that exceeds ₹1 lakh, 1% TDS would be deducted by the insurance company before the payout. If the amount is below ₹1 lakh, no TDS would be deducted. Though the amount would be taxable, you can claim a refund against TDS deducted at the time of filing Income Tax Returns.
Here are the primary provisions under Section 10(10D) of Income Tax Act, 1961:
Maturity payouts must satisfy the following conditions for individuals to avail tax benefits under this Section:
In Budget 2021, a key amendment was introduced under the 4th proviso to Section 10(10D). This amendment was pertaining to ULIPs (Unit Linked Insurance Plans) with a substantially high annual premium amount. As per the amendment, exemption under Section 10(10D) is not applicable to ULIPs issued on or after 1 February 2021, where the annual premium payment is more than ₹2.5 lakh in any year during the course of the policy.
A 5th proviso was also introduced that addressed individuals paying premiums of multiple ULIPs. In such a case, the annual premium payment limit of ₹2.5 lakhs could be applicable. However, these exclusions are not applicable if the ULIP payouts are received as a death benefit.
Needless to say, many people have used insurance policies as tax-saving tools over the years. The primary aim of Section 10(10D) of the Income Tax Act is to encourage people to purchase life insurance policies for protecting their loved ones. However, you must understand the policy terms and exceptions before taking the plunge.
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The total payment under a life insurance policy is eligible for tax exemption under Section 10(10D) of the Income Tax Act. This means that the Income Tax Department has not set an upper limit for this tax benefit.
Yes, as per Section 80C of the Income Tax Act, 1961, the premium payables for a life insurance plan are eligible for a tax deduction. You can opt for a deduction of up to Rs. 1,50,000 under this section.
As per Section 10(10D), the payment made on surrender or maturity of an insurance policy or at the time of a policyholder’s demise will be tax fee. However, you need to satisfy the following conditions:
In the case of insurance policies issued prior to April 1, 2012, the sum assured will have to be 20 times (minimum) the premium.
In the case of insurance policies issued after April 1, 2012, the premium amount should not go beyond 10% of the sum assured.
Life insurance policies can be helpful to you in the following ways:
1. They offer financial assistance to your family
2. Such policies can facilitate your child’s higher education in case of your absence
3. The payouts can be utilised to pay off debt
4. Some annuity-oriented life insurance policies provide regular pensions after maturity
5. You can avail tax benefits through these plans.
ULIPs (Unit Linked Insurance Plans) merge financial investment with life insurance. These policies offer multiple portfolio strategies and fund options. They have a lock-in period of 5 years. After this period is over, you can withdraw money from this plan regularly.
|Section 194IB||Section 44AA||Section 80E|
|Section 195||Section 80EEA||Section 80DD|
|Section 80CCC||Section 80GG||Section 80 G|
|Section 54F||Section 1941A||Section 10|
|Section 194Q||Section 192||Section 269SS|
|Section 80DDB||Section 44AD||Section 194C|
|Section 194A||Section 194H||Section 80D|
|Section 80C||Section 80C, 24(b), 80EE & 80EEA||Section 234A|
|Section 50C||Section 80C||Section 80EEA|
|Section 194B||Section 194J||Section 206C|
|Section 80CCG||Section 80 EEB||Section 24Q|
|Section 40b||Section 194C||Section 54EC|
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