By Balwant Jain
Tax laws allow certain tax benefits for premiums paid for life insurance policies as well as for monies received from the life insurance company. Let’s talk.
Tax advantages for the life insurance premium paid
The deduction for life insurance premium paid can reach 10% of the sum insured and for any premium paid above 10%, the deduction is not available. However, if the policy is taken for a disabled or seriously ill person, the premium up to 15% is allowed.
Persons and type of policies for which the deduction is available
This deduction is available for all types of life insurance policies like term plan, whole life policies, endowment plans and unit linked policies (ULIP) subject to the 10% cap of the sum insured.
The tax benefit for the money is received from the insurance company
Money received from the insurance company on the death of the policyholder is fully exempt from tax under Section 10 (10D) for all types of insurance policies, including premium policies unique and ULIPs.
However, with respect to monies received otherwise than on death, they are only exempt if the premium for the policy did not exceed 10% of the sum insured for any of the years during the period of payment of the premium for all policies issued after 1-4-2012. However, for policies issued for people with disabilities or suffering from a serious illness, a higher threshold of 15% is provided. For policies issued between 1-4-2003 and March 31, 2012, a higher percentage of 20% is allowed. Money received from policies issued before April 1, 2003 is fully tax exempt.
What are the rules for single premium policies?
For single premium policies, the premium paid in all likelihood would exceed 10% of the sum assured, so the deduction under Section 80C would be limited to 10% of the sum assured in the year of payment . Since exemption under Section 10 (10D) is only available if the premium paid does not exceed 10% of the sum insured, money received under a single premium policy otherwise that in the event of death would not be exempt from tax if the premium paid exceeds 10% of the sum insured.
It should be noted that all of the money received at maturity from these policies would not be taxable, but only the difference between the premium paid and the money received may be taxed. The income tax legislation does not contain any specific rules on how the profits from these life insurance policies should be taxed. In my opinion, the premium paid can be treated as an investment and if the policy has lasted more than 36 months, the same can be treated as an investment and only the indexed gain can be taxed at 20%.
What are the rules for
Money received from the insurance company is tax-free for all ULIP policies issued before February 1, 2021, provided the premium paid does not exceed 10%/15% of the sum insured for any of the premium payment periods. However, ULIP policies issued after February 1, 2021 will not qualify for this exemption if the premium paid for such policies for any of the years exceeded 2.50 lakhs during the year.
The same would be taxed as listed shares/unit of equity based schemes and the difference will be taxed at a flat rate of 10% after an initial lakh if the equity component of the scheme was at least 65% for all years. If ULIP did not have this minimum 65% equity stake throughout the term of office, the difference would be treated as a single premium policy as noted above.
(Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on Twitter.)