Topic 4: A fine print of claiming tax benefit on life insurance premium decoded
This article focuses on the tax benefit available under section 80C of the Income Tax Act, on premium paid for life insurance policies. The second in the series will examine the tax treatment of the proceeds of these policies.
The tax benefit on premium paid for a life insurance policy is an important additional advantage of life insurance. It is advisable to understand all aspects of claiming this tax benefit in order to avoid losing it. Let us examine these aspects in detail as per current income tax laws. Pension policies, some of which include a life insurance element, are treated differently for tax purposes. Therefore these are not being considered here.
Tax benefit under section 80C of the I-T Act, 1961, for life insurance premium
As per Section 80C(2) of the Income Tax Act, 1961, any amount paid to an insurer to buy or to keep a life insurance policy in force can be claimed as a deduction from gross total income by the policyholder. This implies that premium paid for a life insurance policy can be deducted from gross total income before arriving at taxable income subject to certain conditions.
Who can get the tax benefit on premium paid for a life insurance policy?
Only an Individual or a Hindu Undivided family ("HUF") can avail tax benefits on premium paid for a life insurance policy.
Does a life insurance policy taken from LIC alone qualify under section 80C?
The answer is 'No'. One can claim tax benefits on a life insurance policy bought from any insurer - private or public sector -- approved by the IRDAI. An insurance policy taken from an IRDAI registered private insurance company is as good as a policy taken from the Life Insurance Corporation of India (LIC) as far as their tax treatment is concerned.
Section 80C tax benefit can be claimed only if the insured is self, spouse or kid(s)
An individual can only claim tax benefit under Section 80C of the Income tax Act, 1961, on life insurance policy(s) bought in the name of self, spouse or children. People often ask about the ceiling on the number of children for whom a life insurance policy can be taken. The answer to this question is: You can buy a life insurance policy for any number of your children irrespective of whether they are minor, major, married, unmarried or adopted. A policy taken in the name of any other person won't be eligible for any tax benefits. In case of a "HUF", the policy can be taken in the name of any of its members to avail of the tax benefits.
Premium can be claimed as a deduction under section 80C only in FY in which paid
Section 80C(2) also clarifies that in order to claim the deduction from gross total income for a particular year, the gross amount of premium must be paid or deposited in that particular financial year itself. For example, for FY 2014-15, the premium must be paid between 1.4.2014 and 31.3.2015 (both dates inclusive) in order to claim the deduction for that year. For example, assume your policy premium due date was 26.3.2015 but you paid the premium late, say after 31.3.2015 but within the grace period allowed by the insurer. The insurer may accept the premium even on say 10.04.2016 as generally 15 days grace period for payment is allowed but the premium so paid cannot be claimed as deduction in FY 2014-15. However, this amount can be claimed as deduction in FY 2015-16 i.e. the FY in which the premium is actually paid.
Maximum tax benefit under section 80C
The maximum amount that can be claimed as the deduction under section 80C is Rs 1,50,000 as per current income tax laws. Section 80C lists several investment options, including the premium paid for a life insurance policy as specified, as eligible avenues for tax benefit. This means that investment, in aggregate, up to Rs 1.5 lakh in one or more of these investment options can be claimed as a deduction from taxable income. Therefore, remember that even if you have invested more than Rs 1.5 lakh in total in these investment options including the premium paid for your policy, only Rs 1.5 lakh can be claimed as the deduction from taxable income.
It is also to be remembered that there are several investment options listed as eligible under Section 80C. Therefore, this tax benefit can also be claimed on investments in options other than life insurance. Consequently, experts advise that life insurance should be bought primarily for the purpose of insurance and not solely for availing the tax benefits.
Further, remember in case you have made investments which are eligible for similar tax benefit under section 80CCC and 80CCD then these investments will be clubbed with investments under Section 80C for the purpose of calculating the Rs 1.5 lakh limit on the tax benefit
Maximum premium allowed for claiming Sec 80C benefit
As per section 80C(3), in case of a life insurance policy issued on or before 31.3.2012 if the gross premium paid in any year exceeds 20% of the actual sum assured, then the deduction (from gross total income) will be available to the extent of 20% of the actual sum assured (SA) and the premium paid in excess of this amount cannot be claimed as deduction. As per Explanation to Section 80C(3A), actual sum assured simply means the sum assured which is least across all the policy years and does not include any bonus amount which is to be received over and above the sum assured This 'actual sum assured' shall also not include any premiums which are to be returned to the policyholder.
For policies issued on or after 1.4.2012, the above mentioned limit of 20% has been changed to 10%.
In case the insured suffers from severe disability or disease as specified by the Income Tax Act and rules and his/her policy was issued on or after 1.4.2013, then for them, the limit of 10% will be increased to 15%. For this purpose, disability has to be one of those specified in section 80U e.g. autism, mental retardation and disease has to be one of those specified in section 80DDB read with Rule 11DD of income tax rules e.g. blindness. So if you take a life insurance policy for your disabled son, then make sure that the gross premium per annum does not exceed 15% of the actual sum assured because the amount paid in excess of this 15% cannot be claimed as the deduction from gross total income.
Minimum lock-in period for the policy to retain tax benefit under section 80C
The policy holder has to hold the life insurance policy and pay the premiums regularly for a minimum number of years as specified in section 80C in order to retain the tax benefit claimed. As per section 80C(5), if the policyholder surrenders his policy voluntarily or in case his policy is terminated by the insurer before a predefined time limit, on failure to pay the dues (i.e. premiums) , then the benefits under section 80C on premium paid for that policy would not be available to him. This means that no deduction will be allowed to him for the premium paid for the year in which the policy is surrendered/terminated and the deductions claimed in earlier years for premium paid, if any, will be considered as his income in the financial year in which his policy is surrendered or terminated (as explained above) and taxed accordingly.
The minimum time period for which the policy must be held by the policy holder in order to retain tax benefits on premium paid are:
>> In case of single premium life insurance policy - 2 years from the date of commencement of policy.
>> In case of ULIPs - at least 5 years, for which premium has been paid, from the start of the policy.
>> In case of any other life insurance policy - at least 2 years, for which premium has been paid, from the start of the policy.
Is there any specified method of premium payment to claim the 80C benefit?
No, the premium can be paid via any method such as by cash, via cheque, account transfer etc in order to claim the 80C benefit. Further, is to be mentioned that life insurance policies bought from foreign insurers (those not registered in India) may attract additional conditions which would vary from case to case.
Source: subramoney.com
The tax benefit on premium paid for a life insurance policy is an important additional advantage of life insurance. It is advisable to understand all aspects of claiming this tax benefit in order to avoid losing it. Let us examine these aspects in detail as per current income tax laws. Pension policies, some of which include a life insurance element, are treated differently for tax purposes. Therefore these are not being considered here.
Tax benefit under section 80C of the I-T Act, 1961, for life insurance premium
As per Section 80C(2) of the Income Tax Act, 1961, any amount paid to an insurer to buy or to keep a life insurance policy in force can be claimed as a deduction from gross total income by the policyholder. This implies that premium paid for a life insurance policy can be deducted from gross total income before arriving at taxable income subject to certain conditions.
Who can get the tax benefit on premium paid for a life insurance policy?
Only an Individual or a Hindu Undivided family ("HUF") can avail tax benefits on premium paid for a life insurance policy.
Does a life insurance policy taken from LIC alone qualify under section 80C?
The answer is 'No'. One can claim tax benefits on a life insurance policy bought from any insurer - private or public sector -- approved by the IRDAI. An insurance policy taken from an IRDAI registered private insurance company is as good as a policy taken from the Life Insurance Corporation of India (LIC) as far as their tax treatment is concerned.
Section 80C tax benefit can be claimed only if the insured is self, spouse or kid(s)
An individual can only claim tax benefit under Section 80C of the Income tax Act, 1961, on life insurance policy(s) bought in the name of self, spouse or children. People often ask about the ceiling on the number of children for whom a life insurance policy can be taken. The answer to this question is: You can buy a life insurance policy for any number of your children irrespective of whether they are minor, major, married, unmarried or adopted. A policy taken in the name of any other person won't be eligible for any tax benefits. In case of a "HUF", the policy can be taken in the name of any of its members to avail of the tax benefits.
Premium can be claimed as a deduction under section 80C only in FY in which paid
Section 80C(2) also clarifies that in order to claim the deduction from gross total income for a particular year, the gross amount of premium must be paid or deposited in that particular financial year itself. For example, for FY 2014-15, the premium must be paid between 1.4.2014 and 31.3.2015 (both dates inclusive) in order to claim the deduction for that year. For example, assume your policy premium due date was 26.3.2015 but you paid the premium late, say after 31.3.2015 but within the grace period allowed by the insurer. The insurer may accept the premium even on say 10.04.2016 as generally 15 days grace period for payment is allowed but the premium so paid cannot be claimed as deduction in FY 2014-15. However, this amount can be claimed as deduction in FY 2015-16 i.e. the FY in which the premium is actually paid.
Maximum tax benefit under section 80C
The maximum amount that can be claimed as the deduction under section 80C is Rs 1,50,000 as per current income tax laws. Section 80C lists several investment options, including the premium paid for a life insurance policy as specified, as eligible avenues for tax benefit. This means that investment, in aggregate, up to Rs 1.5 lakh in one or more of these investment options can be claimed as a deduction from taxable income. Therefore, remember that even if you have invested more than Rs 1.5 lakh in total in these investment options including the premium paid for your policy, only Rs 1.5 lakh can be claimed as the deduction from taxable income.
It is also to be remembered that there are several investment options listed as eligible under Section 80C. Therefore, this tax benefit can also be claimed on investments in options other than life insurance. Consequently, experts advise that life insurance should be bought primarily for the purpose of insurance and not solely for availing the tax benefits.
Further, remember in case you have made investments which are eligible for similar tax benefit under section 80CCC and 80CCD then these investments will be clubbed with investments under Section 80C for the purpose of calculating the Rs 1.5 lakh limit on the tax benefit
Maximum premium allowed for claiming Sec 80C benefit
As per section 80C(3), in case of a life insurance policy issued on or before 31.3.2012 if the gross premium paid in any year exceeds 20% of the actual sum assured, then the deduction (from gross total income) will be available to the extent of 20% of the actual sum assured (SA) and the premium paid in excess of this amount cannot be claimed as deduction. As per Explanation to Section 80C(3A), actual sum assured simply means the sum assured which is least across all the policy years and does not include any bonus amount which is to be received over and above the sum assured This 'actual sum assured' shall also not include any premiums which are to be returned to the policyholder.
For policies issued on or after 1.4.2012, the above mentioned limit of 20% has been changed to 10%.
In case the insured suffers from severe disability or disease as specified by the Income Tax Act and rules and his/her policy was issued on or after 1.4.2013, then for them, the limit of 10% will be increased to 15%. For this purpose, disability has to be one of those specified in section 80U e.g. autism, mental retardation and disease has to be one of those specified in section 80DDB read with Rule 11DD of income tax rules e.g. blindness. So if you take a life insurance policy for your disabled son, then make sure that the gross premium per annum does not exceed 15% of the actual sum assured because the amount paid in excess of this 15% cannot be claimed as the deduction from gross total income.
Minimum lock-in period for the policy to retain tax benefit under section 80C
The policy holder has to hold the life insurance policy and pay the premiums regularly for a minimum number of years as specified in section 80C in order to retain the tax benefit claimed. As per section 80C(5), if the policyholder surrenders his policy voluntarily or in case his policy is terminated by the insurer before a predefined time limit, on failure to pay the dues (i.e. premiums) , then the benefits under section 80C on premium paid for that policy would not be available to him. This means that no deduction will be allowed to him for the premium paid for the year in which the policy is surrendered/terminated and the deductions claimed in earlier years for premium paid, if any, will be considered as his income in the financial year in which his policy is surrendered or terminated (as explained above) and taxed accordingly.
The minimum time period for which the policy must be held by the policy holder in order to retain tax benefits on premium paid are:
>> In case of single premium life insurance policy - 2 years from the date of commencement of policy.
>> In case of ULIPs - at least 5 years, for which premium has been paid, from the start of the policy.
>> In case of any other life insurance policy - at least 2 years, for which premium has been paid, from the start of the policy.
Is there any specified method of premium payment to claim the 80C benefit?
No, the premium can be paid via any method such as by cash, via cheque, account transfer etc in order to claim the 80C benefit. Further, is to be mentioned that life insurance policies bought from foreign insurers (those not registered in India) may attract additional conditions which would vary from case to case.
Source: subramoney.com