Does Your Life Insurance Offers Tax Benefit?

Tax Benefit and TDS on Life Insurance

Tax Benefit and TDS on Life Insurance

We are at the end of Financial year and all life insurance companies have launched some new plans to cash in the last minute “tax saving” frenzy.

But do you know that some of life insurance policies might not give you the desired tax benefit both at the time of investment and also at the time of maturity.

Eligibility for Life Insurance policy to get Tax Benefit?

The tax benefits for Life Insurance are at two stages:

  • While investing, the investment is exempted up to Rs 1.5 Lakhs as part of section 80C
  • At the time of maturity, the maturity amount paid to the survivor u/s 10(10D) is tax free

But Budget 2012 put on following conditions for Life Insurance policies to qualify for the above tax benefits:

  1. Only insurance policies which have sum assured of more than 10 times the annual premium paid would be eligible for Tax Benefit u/s 10(10D) at the time of maturity payment.
  2. At the time of investment the tax benefit would be limited to minimum of (annual premium paid, 10% of Sum Assured, Rs 1,50,000) u/s 80C.

This change is for all Life Insurance Policies bought after March 31, 2012.

Also Read: How are ULIP & Life Insurance Policies Taxed on Surrender & Maturity?

Exception:

As a special case for life insurance of the disabled and those suffering from ailments, the annual premium can be less than 15% of the sum assured – i.e. – Sum assured should be greater than 6.67 times the annual premium. This change was made in Budget 2013.

Also Budget 2014 has mandated 2% 1% (effective June 1, 2016) TDS on the amount payable at maturity under Section  194DA for all payments greater than Rs 1 lakh. So this taxation is getting stricter and trackable.

Budget 2015 has introduced the facility to fill Form 15G/15H in case your annual income is less than the minimum taxable limit and you don’t want TDS deducted on Life Insurance maturity payment. This would be effective from June 1, 2015.

The above changes in tax laws applies to all kind of Life Insurance Policies, be it ULIP, Endowment Plan or Return of Premium Plans.

In case the Life Insurance does not qualify for tax benefit as above u/s 10(10D), the income received at the time of maturity on survival would be added to your income and taxed to your marginal tax rate.

You need not worry about the Term Insurance as the Sum Assured is always more than 10 times the annual premium paid. But if you are investing in ULIPs, Endowment Plan or Return of Premium Plans you need to do a thorough check.

There might also be cases where a Life Insurance policy can be Tax Free for only a selected group of investors.

An Example:

Take example of HDFC Standard Life Insurance online ULIP – HDFC Click2Invest. In this case the investors opting for Single Premium would not get tax benefit u/s 10(10D) as the sum assured is only 1.25X of annual premium paid.

Also investors with age more than 55 years would not get any tax benefit at the time of maturity as the sum assured is only 7X of annual premium paid.

However they would get limited tax benefit u/s 80C using the following formula: minimum of (annual premium paid, 10% of Sum Assured, Rs 1,50,000)

Only investors opting for regular premium payment and aged less than 55 years would get full tax benefit both at the time of investment and at the time of maturity.

Do check and recheck before investing in these plans!

Remember Life Insurance should be an “expense” to cover the risk of your life and never an “Investment”.

108 thoughts on “Does Your Life Insurance Offers Tax Benefit?

  1. whether NRI is eligible for tax deduction.his sum assured is Rs.1000000 and is premium is Rs.2000000.please explain

    • The sum assured is just twice the annual premium, so the maturity amount would be taxable. The insurance tax benefits does not depend on residency status of individuals – so its irrespective of you being NRI.

  2. Through Life insurance policies everyone can save taxes but you should be smart enough to buy any life insurance policy for saving tax. Because, investing in every life insurance policy doesn’t means saving of tax. Important sections under life insurance plan are Section 80C, Section 80CCC, Section 80CCE, Section 80D, Section 80D etc.

  3. R. K. Bansal says:

    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 [email protected] 2%. Will the entire amount of 3.48 lacs become taxable u/s 10(10D)?

  4. 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.

    • Chintan Grover says:

      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.

        • Chintan Grover says:

          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.

  5. 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!

  6. Panchapakesan.V says:

    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.

      • Panchapakesan.V says:

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

      • Dolreich Pinto says:

        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.

  7. Datta Nalawade says:

    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.

  8. 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.

  9. PRABHAKARAN V says:

    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

  10. 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.

  11. Kamlesh italiya says:

    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.

  12. 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.

  13. Hi Amit,

    Im planning to invest 2k monthly on SBI life ULIP(E-wealth insurance) for 10 years, Person who contacted me said there will be no Service tax(14%) & TDS 2% deductions on my investment & maturity respectively.As of now Im earning 1.8L/annum.
    Looking for your suggestions..

    • If you are looking to invest in ULIP for saving tax, ELSS (Tax Saving Mutual Funds) are much better choice. They offer flexibility, are more transparent and have no adverse impact on pre closure.

  14. G.PARTHASARATHY says:

    Paid total premium of Rs.200000/- @ of Rs.50000/- premium per annum in 2007 to 2010 Under sec 80C with withdrawal benefit as per 10(10)D to the SBI Life Unit insurance cum pension . In May 15, I pre closed and received Rs.322000/- after TDS detection @ 2%. The sum insured is Rs.500000/- and the annual premium paid is less than 10%..I hope that the amount received is exempted from tax.

    • Unfortunately there are serious tax implications for premature withdrawal of Pension plan.

        First the premiums that you have claimed as part of deduction under section 80C in previous years would be reversed and you will have to pay tax on it.
        Secondly, the entire surrender value will be added to your income and you will have to pay tax on it according to your tax slab.

      Now taking your case if you have claimed exemption of Rs 50,000 every year u/s 80C then you will need to add that exemption as income in FY 2015-16 which is Rs 2 Lakhs
      Also you will need to add the maturity amount to your income in FY 2015-16. So in all you will have to add Rs (2+3.2 = 5.2 lakh) as income in FY 2015-16 and pay tax accordingly.

    • G.PARTHASARATHY says:

      The tax benefits for Life Insurance are at two stages:

      While investing, the investment is exempted up to Rs 1.5 Lakhs as part of section 80C
      At the time of maturity, the maturity amount paid to the survivor u/s 10(10D) is tax free
      But Budget 2012 put on following conditions for Life Insurance policies to qualify for the above tax benefits:

      Only insurance policies which have sum assured of more than 10 times the annual premium paid would be eligible for Tax Benefit u/s 10(10D) at the time of maturity payment.
      At the time of investment the tax benefit would be limited to minimum of (annual premium paid, 10% of Sum Assured, Rs 1,50,000) u/s 80C.
      This change is for all Life Insurance Policies bought after March 31, 2012.

      Dear Amit, as I have taken my sbilife before 2012 and as such per old sec 10(10D) clause my maturity amount is exempted from Tax.

      • The above rules are for Insurance Plans and not for Pension products. You mentioned “SBI Life Unit insurance cum pension” which seems like pension plan (cannot find this product on SBI Life Website)

  15. Dear Amit,
    I have invested in ULIP plans of many insurance companies. All these plans meet the criteria of being exempt under Section 10 (10d). i wanted to know that whether i will be subject to tds of 2% under section 194DA if i surrender a 10 year policy after just 5 years.

  16. Sukrant Bora says:

    Dear Sir / Madam,

    I came to know about your website from one of my friend and found ur email id. I have 1 query, My father has taken Birla sun life insurance in which he is the owner of the policy and I am the one who is insured. For year 2014-15 tax planning, I have paid the premium for this policy, request you to please let me know whether I can claim tax benefit or not.

    Regards,
    Sukrant Bora

    • What I understand is, your are insured by this policy but the policy holder is your father. The tax benefit can be claimed by one on whose name the investment is done, irrespective of who makes the payment. So in your case only your father would be able to claim tax benefit and not you.

      My comment is based on limited info you provided. If possible let me know the plan name and then we may investigate further.

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