Income tax benefit on Life Insurance: Section 80C and 10D

If you are keen on using your money right, you are bound to seek some professional counsel on money. In most cases, this counsel ends up being a financial planner. Now, any financial planner you go to, will offer a fixed set of advice along with a smattering of other unique guidelines that suit you. Part of that fixed set of advice is to save tax and make sure your family is financially secure. Now ensuring your family’s security means earning and saving more money. Earning more money, in turn, means paying more tax. Hence, you end up in a vicious cycle that leads you nowhere.

This is where one of the main features of life insurance can help you. Its primary purpose is to make sure that your family is secure even in the unfortunate event of your death. But it also offers a great deal of tax benefits. Here is a look into what these benefits are:

Tax benefits on life insurance

The purpose of looking for tax benefits is to save tax. Tax can be saved by making smart investments into the right investment opportunities. With life insurance, the premium you pay is the investment, and the life coverage you receive is the return on that investment. Simply put, you buy a life insurance policy, you get tax benefits. Hence, if you want tax benefits, there is no safer investment opportunity than life insurance. Since the government only grants tax benefits, it is important to look at the government provisions that life insurance uses to give you tax benefits.

  • Section 80C

Section 80C is a part of the Income Tax Act. The Income Tax Act is the handbook for all things related to tax in the country. As per Section 80C of the Income Tax Act, the premium paid for life insurance policies qualifies you for a deduction in income tax. When you choose to buy life insurance, you do two things. Firstly, you secure your family’s financial future. Secondly, you put money into the national economy and create a chance for further addition as well. For doing so, the government rewards you with an income tax deduction. This deduction is based on the amount you pay as premium.

However, the maximum limit of tax deduction as per Section 80C is ₹ 150,000. Moreover, this is only applicable on policies that were bought initially before 31st March, 2012. For policies issued after April 2012, the tax deduction is capped at 10% of the sum assured.

Under section 80C of the Income Tax Act, if a person voluntarily surrenders their insurance policy, the policyholder will not be entitled to any benefits under the scheme.

  • Section 10D

Section 10D is another part of the Income Tax Act. It primarily deals with the surrender or maturity of a life insurance policy. It decides the tax benefit that a policyholder is entitled to in such a situation. Firstly, Section 10D only applies to life insurance policies that have a surrender or maturity benefit. A surrender benefit would be any amount the policyholder receives for surrendering the policy. Similarly, a maturity benefit is the amount paid to the policyholder for surviving the policy. For the policyholder, any of these amounts is income. Hence, you would logically think they would be taken into consideration for income tax. Section 10D makes sure that doesn’t happen.

As per section 10D, any amount paid as surrender or maturity benefit is exempt from being considered as taxable income. This also applies to the death benefits as well. Section 10(10D) of the Income Tax Act, 1961 also applies to the gains and proceeds from a ULIP. However, the condition is that the premium paid towards the policy should not be more than 10% of the sum assured.

Income tax is the civic duty of every citizen of the country. However, it is a smart thing to get any tax deductions that you can. It is even better to get these deductions through life insurance plans. This way, you get life coverage along with savings.