Tax implications of a Life Insurance Policy

Life is important and life lost has a tremendous impact on your near and dear ones. The emotional scars are hard to cure but one may never want their family to go through financial crisis as well. With this view Insurance has been allowed as a major deduction by the Income-tax so that more and more people invest in Life Insurance.  Before choosing any Life Insurance one should take into account its tax implications as provided by the Income-tax Act, 1961.

1. Who could be the beneficiaries for the Insurance Policy?
   For claiming tax deduction, the Life Insurance Policy could be taken on the life of taxpayer himself or his/her spouse and children (whether minor or not and dependant or not).

2. Who can claim the Tax Deduction?
   In case of Individual, deduction can be claimed if policy is taken in the name of own life, life of spouse or any child.In case of Hindu Undivided Family(HUF), policy should be in the name of any member of the family.Only the person making payment of the Premium of Life Insurance can claim deduction.

3. What is ceiling limit for claiming Deduction for payment of Insurance Premium?
   Income-tax Act provides ceiling limit for claiming deduction of payment of Life Insurance Premium as mentioned below-

Note 1 : Disabled persons are defined as persons suffering from blindness, low vision, leprosy cured, locomotor disability, hearing impairment, mental retardation, mental illness etc and as specified u/s 80DDB of the Act.

Note 2: ‘Sum Assured’ means Amount of Life Insurance Policy i.e. Life Cover.

If the amount of premium exceeds the ceiling limit then taxpayer can avail deduction only upto ceiling limit as specified in above table.

e.g. 1 – Mr. Gokul took a family Life Insurance Policy which covers his spouse and children on 15th May, 2015. The capital sum assured is Rs. 10,00,000/-. He paid annual premium of Rs. 75,000/- during the Financial Year 2015-16. How much deduction can be claimed?
Ans.- The capital sum assured in case of Life Insurance Policy of Mr. Gokul is Rs. 10,00,000/- and the policy drawn on 15th May, 2015. Hence, the amount of deduction allowed on premium should not exceed 10% of the sum assured, which is Rs. 1,00,000 in this case . Annual premium paid is of Rs. 75,000/- which is within the specified limit. Hence Mr. Gokul can claim tax benefit of the whole Rs. 75,000/-,  U/s. 80C of the Act, in his Income-tax Return.

e.g. 2 – Mrs. Pooja took a Life Insurance Policy for Rs. 4,00,000/- on 1st April, 2013 on the life of her son who is suffering from blindness. She paid premium of Rs. 80,000/- during the year 2015-16. How much deduction can be claimed?
Ans.- The date of policy is 1st April, 2013 hence the amount of deduction allowed on premium should not exceed 15% of the sum assured, which is Rs. 60,000/-. As premium paid( Rs. 80,000/-) is beyond the specified limits, she can claim Deduction of Rs 60,000/- only.

4. Are proceeds of life insurance policy taxable?

e.g. 1 – Miss Madhu took Life Insurance policy on 1st Jan., 2013 for Rs. 1,50,000/-. She paid annual premium of Rs. 50,000/- every year. After 3 years on 1st Jan., 2016 she received Rs. 1,75,000/- (including bonus) from the insurance company as maturity proceeds. Advise her about the taxability of the maturity proceeds.
Ans.- Miss Madhu took insurance policy on 1st Jan., 2013 hence the amount of deduction allowed on premium should not exceed 10% of the sum assured. In this case, amount of premium should not exceed Rs. 15,000/-. However she paid annual premium of Rs. 50,000/-. Since the limit of specified percentage has been crossed, the maturity proceeds are taxable. Miss Madhu is required to consider this income under Income from other sources in her Income-tax Return.

5. Is tax deducted on the maturity proceeds of Life Insurance?
   If the proceeds of life insurance policy are taxable then TDS provisions are applicable. In such a case the Insurance Company should deduct tax U/s. 194DA of the Act at 1% at the time of making payment. However, tax is not required to be deducted if the amount of proceeds are less than Rs. 1,00,000/-.

e.g. 1 – :- Mr. Prakash took insurance policy on 27th June, 2012 for Rs. 2,00,000/-. He paid premium of Rs. 50,000/- every year. On 26th June, 2017 he received Rs. 2,25,000/- (including bonus) as the maturity proceeds. State whether TDS provisions are applicable or not.
Ans.- Policy taken after 1st April, 2012 hence amount of deduction allowed on premium should not exceed 10% of the sum assured. In this case, the sum assured was Rs. 2,00,000/- so amount of premium should not exceed Rs. 20,000/-. However actual premium paid(Rs. 50,000/-) is more than ceiling limit, hence the proceeds are taxable.

As per Sec. 194DA, since the proceeds are more than Rs. 1,00,000/- TDS provisions are applicable. Hence the insurance company will deduct TDS @ 1% of Rs. 2,25,000/- i.e. Rs. 2,250/- while making the payment of the maturity proceeds.

e.g. 2 –  Mr. Kumar received Rs. 1,00,000/- as the proceeds of his life insurance policy. Advise him regarding TDS provisions of the proceeds.
Ans.- Tax is not required to be deducted on the proceeds of insurance policy if the proceeds are less than Rs. 1,00,000/-. In this case, proceeds are Rs. 1,00,000/- hence TDS at 1% i.e. Rs. 1,000/- will be deducted.

We have tried to cover the tax implications of Life insurance but one must remember that tax saving is not the only purpose for taking a Life Insurance Policy. The taxpayers are advised to take into consideration all the other aspects of life insurance including his/her financial needs, number of family members dependent on him/her, TDS provisions on maturity, etc.

At the end The only person who will take care of the older person you will someday be, is the young person you are now.