Does Your Life Insurance Offers Tax Benefit?

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• Amit, useful article. I have a query. I bought a ULIP from IDBI Federal in Dec 2010, paying a one-time premium of 3 lacs and sum assured being 3.3 lacs. On maturity, I got paid 3.41 lacs after deduction of TDS@ 2%. Will the entire amount of 3.48 lacs become taxable u/s 10(10D)?

  • Yes entire maturity amount would be taxed.

• As discussed in this blog post it’s not sure that all of the Insurance policies provide you tax benefits. I you are looking to save tax through insurance then you should be aware about the all of the income tax laws. If you made wrong decision then you should not only get less benefit but also have to pay tax on entire maturity amount. For more information regarding insurance policies for tax savings you can refer to the articles provided by Big Decisions.

  • One of my friend having same issue, he buy a policy to save tax but at the time of maturity he come to know that he has to pay taxes on whole amount. So, after that incident I am always in confusion that I buy a policy or not.

    • There should be no confusion. You should not buy anything from insurance companies other than pure term insurance. Mutual Funds are much more transparent, well regulated with lower costs and flexibility to exit anytime.

      • Amit, So, If i buy Mutual Funds then what benefits should I get. And, please tell me in detail about Mutual Funds. Because, what i know about Mutual funds is that they are for 3 years but i don't know about the exact benefits of buying Mutual funds rather than going for any other investment.

        • Mutual funds are investment option where you invest your money in different funds offered by mutual fund companies and a professional fund manager manages the fund. You will need to research more about mutual funds.

          The lock-in of 3 years is only for ELSS or tax saving mutual funds. For all other funds you can invest and redeem anytime. Would recommend you to search more online. Some posts on my blog about mutual funds would also be helpful.

• Hi Amit,

  I have one query, looking for your help, as stuck with this on e felling now.
  I had purchased the ULIP in 2006 with Rs 5000 monthly premium.

  However i had done the partial withdraw during year 2009.

  I was still continuing to pay the premium of Rs 5000 per month till Oct 2015. I have surrender the policy and got the amount with 2% TDS deduction.

  Do this complete amount is taxable? or while filing ITR I, can show the Profit (Settlement Amount – Premium Paid) only under Income from other source?

  • As your ULIP was bought in 2006, the surrender value would be taxable only if your insurance cover was less than 5 times of annual premium. Assuming this to be true, you will need to show the entire surrender value (before TDS and including premium paid) as income from other sources.

    • Hi Amit,

      I discuss with my CA, he told me that the calculation will be as below.

      If the Yearly Premium amount paid more than 20% of sum assured then whole amount received from ​​​Life Insurance will be taxable.​ Other wise not.

      • Well its the same thing "insurance cover less than 5 times of annual premium" means "Yearly Premium amount is more than 20% of sum assured". For e.g. if your annual premium is Rs 20,000 for insurance cover (sum assured) of Rs 1 lakh, the cover is 5 times the annual premium and also the premium is 20% of the sum assured!

• Hi Amit,

  I am a pensioner aged 65 years. I have opened Life Time Super Pension account with ICICI prudential on 26/03/2007. I have paid an annual premium of 60000/- and claimed exemption under sec80C till the FY ended 2015-16. Vesting date falls on 26/03/2017. I have been asked to give my annuity option. I am not interested to go for pension plan instead interested to withdraw the current NAV value of 10 lakhs. I am told that I have to include the entire amount of 10 lakhs in my IT return for the current financial year. Is it So?

  On the alternate, I am advised to invest the current NAV amount of 10 lakhs as one installment in Unit Linked Insurance plan of ICICI Prudential as a proposer with policy in my daughter’s name, with a sum assured, ten times the value of my initial onetime payment. The policy term is for 10 years. With a facility to surrender after 5 years or can make partial withdrawals after 5 years.

  I would like to know:

  1. If I withdraw entire amount of 10 lakhs on vesting date ie 26/03/2017 or before that, whether I have to include
  the entire amount to my income for the FY 2016-17 or only the interest portion.

  2. Whether the above withdrawal attracts service tax and TDS.

  3. If I invest under their ULIP scheme ( mentioned in para 2) and withdraw the maturity amount after 10 years
  whether the whole amount is exempted from IT under section 10 (10D) including service tax?

  4. What will be the position if I surrender or make partial withdrawal after 5 years. Whether it attracts IT and
  service tax.
  Appreciate your early reply.

  Regards,
  Panchapakesan.V

  • ICICI Pru Life Time Super Pension is ULPP (Unit Linked Pension Plan). These are one of the most inefficient products for retirement planning. As of today you have only two options: 1) Surrender the ULPP before vesting date or 2) wait till maturity and start annuity.

    As per rules you can withdraw up to 1/3 maturity amount tax free and remaining 2/3 amount has to be necessarily used to buy annuity. The annuity paid is fully taxable.

    If you decide to surrender, the entire amount received would be added to income and taxed accordingly. Also there would be TDS applicable. There would be only income tax applicable and no service tax in this case.

    Service tax is applicable only when you buy new policy or annuity.

    Also buying new policy would not solve anything, it's just miss-selling you another insurance product so stay away from that.

    • query pertaining to ICICI Pru Lifetime Super Pension & Premier Life Pension , Policy held with ICICI Prudential Life Insurance Company Limited.
      The policy was issued on February 2, 2008 and 23, 2009 along with the first premium deposit for the said policies.
      I want to surrender the policy. As per the product norms surrender Value is payable after the policy has completed 3 years and the premium have been paid for 3 yrs.
      One policy is full NRI funds, second policy 1/4 is NRO funds. ICICI pru
      First policy deducted TDS 30%
      Premium paid 30lac in 2008 and 2011 for first policy deducted TDS and are paying amt Rs36,12,750.
      Letter stated zero TDS
      Premium paid for 5lac second policy 2009 and 2013 for second policy a sum was paid by DEmand draft for which we are able to find the sorce but are ready to to say it's NRO just bcz the banks are not cooperating in giving information.
      Amt yet to pay Rs 894146.

      I live abroad since 1998/9 till date.
      Since a month am trying to get the surrender Amt. but either ICICI has not submitted repatriation letter or are unsuccessful in NEFTS which was my first request.
      TDS has been debuted but letter issued states 0.00 is this ethically right,
      Every day I spend time on phone or email but in vain. Hardly get responses. Their greivece dept is as good as dead.

      Is Icic right in deducting tax for NRI funds if yes are they right to state zero.
      Thanks for reading and would be great if you could respond.

    • Thank You very much Amit, for your quick and clear reply.

• any insurance company give extra tax benefits above 1.50 laks saving limit

  • No the tax benefit for life insurance is limited to Rs 1.5 lakhs u/s 80C. Additionally you get tax benefit on premium paid for medical insurance on behalf of self or your parents u/ 80D.

• Dear Sir,
  I have received maturity amount of Rs.156800.00 of SBI life policy during FY 2014-15 after deduction of TDS @2%.

  My query is " whether I have to include/show full amount of Rs.156800.00 in my income tax ITR for AY 2015-16 or I can make deduction of amount of premiums which i had paid to SBI in last 3 years ? Pls guide me.

  • There is no clarity about the benefit of deduction available for computation of tax. However experts are of the view that you can deduct the premium paid from the maturity/settlement amount to arrive at tax computation. So while filing ITR you can show the Profit (Settlement Amount - Premium Paid) only.

• Dear Sir,

  I have bought 2 Unit Linked Pension Plan policies in Dec,2005 ( Annual premium Rs.2.5 L for 10 years. Paid up after 3 yrs-7.5 L as per original retirement planning done by HDFC Fin consultant.) The 2 ULPPs are maturing this December,2015. The premiums were tax exempt u/s 80-CCC. These HDFC ULPPs were invested wholly in HDFC Equity Growth fund as per my choice. Now Am I eligible for10(10D) exemption for the maturity amount 15.78 L X 2 ? ( at the time of investment,they said the redemption is tax exempt and now they are silent). I am not availing Annuity plan. If it is taxable, is it for full amount or only on the profit earned? Can I opt for indexing? Is there any benefit if I redeem before maturity?

  Await for your views. Thanks, Regards,

  PRABHAKARAN

• Hi Amit,

  Thanks for your very detail reply and clarification.

  I had purchased the ICICI prudential life time plan (ULIP) in 2006 with Rs 50000 yearly premium and sum assured as 250000. That time maturity was under 10 (10D) benefit (due to sum assured is 5 time of the yearly premium).

  However i had done the partial withdraw during year 2009 and ICICI had reduced the sum assured to 1,00,000 Rs.

  I was still continuing to pay the premium of Rs 50000 per year till June 2015. I have surrender the policy and got the 443000 Rs with 2% TDS deduction.

  Do this complete amount is taxable?

  • Seems to be a bit complicated. As per my understanding there should be no tax implication of surrender value as it was done after 5 years. But I would strongly suggest you to take second opinion as I am not very sure about this.

    Also would urge readers to help Harshad on this.

• I have invested 100000rs of my customer in traditional plan. His basic insurance 860000 and I also give accident death benefit rider 860000. So my question is that shall his maturity is tax free under sec 10-10D????

  • What I understand is your client has sum assured of 8.6 Lakhs for annual premium of Rs 1 lakh. This policy would not be eligible for tax exemption on maturity as the sum assured is less than 10X of annual premium.

    The additional benefit for accidental death would not be considered for above calculation.

• Thank for your replay,

  Im going to ULIP for investment(Moderate risk) not for the saving tax, As Im not under any tax slabs.
  What would be my avg returns after 10years, Do I have chosen right investment?? or I'm I taking risk?
  Basically this is my first investment/Saving & I don't have much idea about market/taxes etc..

  • ULIP should be avoided as it requires very long term commitment. In case you need to withdraw midway you might loose heavily. In case you want lower risk investment than pure equity go for balanced mutual fund.