A life insurance policy is much more than a financial safety net for your family. It not only provides a financial cushion to the nominee in times of need but also benefits the life insured during the tenure. Along with the maturity/survival/death benefit, life insurance also offers tax benefits to the policyholder. So, not only do you have peace of mind, but you can also take advantage of exciting tax benefits. At the time of ITR filing, you can claim tax benefits for premiums paid towards a life insurance policy. However, there are certain clauses and conditions that you must fulfil to get the benefits. Let’s carefully discuss the impact of ITR on life insurance premium.
What is ITR?
Income Tax Return or ITR is a prescribed form that every taxpayer has to file each year before 31st July. The form contains the details of the income earned by an individual in a financial year, the taxes paid on the income, and also the various tax benefits that an individual is eligible for. Filing an ITR is mandatory for anyone with income above ₹3 lakhs (new tax regime) or ₹5 lakhs (old tax regime). As a taxpayer, you also have the option of ITR Efiling. ITR filing online can make the process simpler and easier.
Tax benefit on life insurance premium
The premium paid on life insurance attracts tax benefits as well as tax liabilities. Under the Income Tax Act of 1961, several deductions can be enjoyed. Check out the bullets for more information:
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Section 80C of the Income Tax Act
One of the most popular tax benefits for life insurance premiums is under Section 80C. A policyholder can claim tax deductions of up to ₹1.5 lakhs under 80C of the Income Tax Act of 1961 for premiums paid towards life insurance.1
This tax deduction benefit is available for individuals and HUFs (Hindu Undivided Families). You must note that the deductions u/S 80C are offered along with other items like PPF (Public Provident Fund), NSC (National Savings Certificate), fixed deposits, and ELSS (Equity Linked Savings Scheme).
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Make a Note:
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- Union Budget 2024 increased the standard deduction limit under the new tax regime ₹50,000 to ₹75,000 for Assessment Year 2025-26 (FY 2024-25).
- 80C deductions are not available under the new tax regime.
- To claim Section 80C tax deductions, the annual life insurance premium for policies purchased after 1st April 2012 must not exceed 10% of the total sum assured amount. Policies purchased before 1st April 2012 have this limit set at 20%.
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Section 10(10D) of the Income Tax Act of 1961
Another essential Section is the 10(10D) of the Income Tax Act of 1961. The death benefit of a life insurance policy remains tax-free in any circumstances. The maturity or survival benefit is also tax-free, given the conditions are fulfilled. In case the policy offers a bonus, the amount remains tax-free.
The life insurance premium purchased after 1st April 2012 that does not exceed 10% of the sum assured amount is eligible for complete tax exemption under Section 10(10D) of the Income Tax Act of 1961. For policies purchased before 1st April 2012, this limit is set at 20%.
Note: The maturity benefit received on life insurance policies purchased after 1st April 2012 is tax-free. However, the annual premium must not exceed 15% of the total sum assured.
When is maturity benefit taxable?
Various life insurance policies offer maturity benefits. It refers to the amount received by the policyholder if the life assured (who can also be the policyholder) outlives the policy tenure. The maturity benefit is also eligible for tax benefits. However, in some cases, maturity benefits may attract taxes. These are:
- If the annual premium of the policies purchased after 1 April 2003 but on/before 31 March 2012 is over 20% of the sum assured
- Life insurance policies purchased after 1 April 2012 with an annual premium exceeding 10% of the total sum assured are taxable.
- If the policies purchased after 1st April 2013 for a person with a disability or a specified disease (under Sections 80U and 80DDB) exceed the annual premium limit of 10% of the sum assured.
Latest Union Budget Updates on Life Insurance Premium and ITR Benefits
The union budget keeps updating the taxability of life insurance. Recently, the union budget of 2023 introduced several changes in the life insurance taxability.
These are:
- Life insurance policies (except Unit-Linked Insurance Policy) purchased on or after 1 April 2023 now attract tax liability. This is also applicable when you buy online life insurance.
- An income from the life insurance policy with an aggregate premium of ₹5 lakhs or above will be taxable
- The changes in the tax liability do not impact the death benefit of the policy. It remains tax-free under Section 10(10D) of the Income Tax Act, of 1961.
Note: ITR filing usually has a deadline of 31st July of the assessment year.
Conclusion
The life insurance premium paid by an individual is eligible for tax benefits. Depending on the total premium paid and the insurance benefits, the tax benefit can be claimed under two sections of the Income Tax Act of 1961; Section 80C and Section 10(10D). A taxpayer can save up to ₹1.5 lakh against the life insurance premium. To avail of tax benefits, it is essential to file the ITR (Income Tax Returns) on time. So, make sure to keep a tab on the date and submit early.
FAQs
Is life insurance policy payout taxable?
The union budget of 2023 introduced several updates on life insurance taxability. Policies purchased after 1st April 2023 with an annual premium above ₹5 lakhs are taxable.
How much tax benefit can I claim under Section 80C?
Section 80C of the Income Tax Act of 1961 allows an individual or a HUF to claim tax deductions of up to ₹1.5 lakhs on life premiums paid. The limit also includes other financial products like NSC, PPF, ELSS, etc.
Is maturity benefit taxable?
The maturity benefits of a life insurance policy are taxable in certain cases. If the annual premium paid exceeds 10% (for policies purchased after 1 April 2012) and 20% (for policies purchased before 31st March 2012), the maturity benefit can be taxable.
