Many middle-class individuals worry about taxes. They try to minimise their tax liability. However, they are not aware of the ways which may help them to minimise the taxable income. One such way is a life insurance policy.

This policy allows taxpayers to reduce their tax liability to some extent. It also helps the policy buyer to build a considerable amount. The policy buyer may avail of financial security with this policy in an emergency.

Life Insurance Policies

Like other policies, life cover is also a contract between the insurance companies and policy buyers. The insurance company guarantees the buyer to provide life coverage (to pay a sum of money to the policy beneficiaries) when the buyer dies. The buyer pays a specific amount in exchange for the coverage. This amount is known as a premium. The life cover is a legally binding contract. The insurance company cannot avoid its responsibilities when the policy buyer dies. The insurance company must fulfil its responsibility if the death is not contrary to the terms and conditions of the policy.

Here are some key takeaways from life insurance policy.

  • The life cover is a great financial tool for an individual.
  • The buyer must pay the premium on time to continue the life cover policy.
  • The beneficiary will receive the death benefit or a sum of money if the policy buyer dies during the policy's tenure.
  • Term life insurance expires after some years. However, permanent life insurance remains in force till the lifetime of the policy.

Life Insurance Tax Benefits

Here are the life insurance tax benefits one may enjoy after buying the life cover policy.

1. Section 80C

Every life cover policy is eligible for tax benefit or tax exemption under section 80C of the Income Tax Act of 1961. An individual may receive the life insurance tax benefits on the premium he pays to the insurance company. The life insurance tax benefits apply to different types of policies. This includes a whole life cover plan, term insurance plan, money-back policy, ULIP (Unit Linked Insurance Plans), and endowment plan. However, some conditions apply to the life insurance tax benefits.

Let us discuss these conditions in detail.

  • Maximum deduction: One may receive the maximum deduction of Rs. 1.5 lakh.
  • Tax exemption: Tax exemption is only applicable for the payment of premium in favour of self, dependent children, dependent parents, and wife or husband. An individual who buys an insurance policy for his friend cannot enjoy the life insurance tax benefits. The beneficiary must be his family member.

2. Section 80CCC

This section of the Income Tax Act offers an exemption (life insurance tax benefit) for the amount that the policy buyer pays for an annuity plan. This is applicable to secure a pension. The policy buyer may receive a maximum deduction of Rs. 1.5 lakh.

3. Section 10 (10D)

The entire amount that a policy buyer receives from the insurance company is exempted from the taxable income. However, this is also subject to some conditions. The exemption only applied to the following.

  • Death benefits: The amount that the beneficiaries receive after the death of the policy buyer.
  • Sum assured: The amount that the policy buyer receives on the maturity of the policy.
  • Bonus: The additional amount that a policy buyer receives along with the maturity amount.
  • Surrender value: The amount that a policy buyer receives after surrendering his policy.

Life Insurance Tax Benefits: Case Study

Mr Rajeev has made the following payments during the financial year 2023-24 to receive the life insurance tax benefit under section 80C of the Income Tax Act of 1961.

  • He made the payment of Rs. 8,400 for his life cover policy. He purchased this policy in April 2011. The insurance company promised him of sum assured of Rs. 25,000.
  • He made the payment of Rs. 1,000 on another life cover policy. He missed the payment deadline and made the payment in April 2024 instead of March 2023.
  • He made the payment of Rs. 30,000 for the life cover policy that he purchased for his wife. He purchased this policy in favour of his wife in April 2012. The insurance company promised of sum assured of Rs. 2,00,000.
  • He made the payment of Rs. 30,000 for the life cover policy that he purchased for his three children. This includes one minor daughter, one married daughter and one married son who is practising law. He purchased a term insurance plan for his children and the premium for the policy was equal to 5% of the capital sum assured.
  • He made the payment of Rs. 25,200 for a life cover policy that he purchased in favour of his dependent parents.
  • He made another payment of Rs. 2,520 for the life cover policy for the parents (in-laws) of his wife.
  • He made the payment of Rs 5,000 for the life cover policy for his younger sister and brother. They both are dependent on him.
  • He invested Rs. 60,000 in PPF.
  • He also invested Rs. 10,000. He receives Rs. 1,000 interest on his investment.
  • He paid Rs. 5,000 in tuition fees for his minor daughter.
  • He made the repayment of a house loan of Rs. 12,000.
  • Lastly, he deposited Rs. 10,000 in the post office.

Now, the question arises what deductions can Mr Rajeev avail from the life insurance tax benefits under section 80C for the financial year 2024 25?

How much claim is he entitled to receive for the payment made above?

(A) Mr Rajeev can claim life insurance tax benefits under section 80C of the act for the payment he made to buy the life insurance policy last year. However, one must note that the deduction is only applicable for the payment made in favour of the taxpayer (himself), dependent children, dependent parents and wife. He cannot claim any life insurance tax benefit for the payment made in respect of the life cover policy that he purchased in the name of any person other than his family. It is also important to note that Mr Rajeev can claim only 20% life insurance tax benefit for the policy issued on or before 31 February 2012. He may only claim a 10% deduction in respect of the policy issued on or after 1 April 2012.

Considering these provisions, the life insurance tax benefits that he may claim are as follows

  • Mr Rajeev has purchased life insurance for himself for Rs. 8,400. He purchased the same in April 2011. Therefore, he may claim a 20% deduction on the sum assured. The sum assured was Rs. 25,000 and 20% of this amount shall amount to Rs. 5,000. So, he shall be eligible to claim a life insurance tax benefit of Rs. 5,000 out of Rs. 8,400.
  • One may claim a deduction on a payment basis. He failed to make the payment of Rs. 1,000 for another life insurance policy. He made the payment late in April 2024. Therefore, he cannot claim any tax deduction for this payment. However, he shall be able to claim the same in the next year.
  • He purchased one more life cover policy in favour of his wife. He paid Rs. 30,000 for the same. He may claim a deduction of 10% of the sum assured. The sum assured in this case was Rs. 2,00,000. The 10% of Rs. 2,00,000 shall be equal to Rs. 20,000. Therefore, he may claim a life insurance tax benefit of Rs. 20,000 out of the payment made of Rs. 30,000 to buy this policy.
  • In the fourth case, he purchased a life insurance policy in favour of his children for Rs, 30,000. He may claim the entire amount for the tax deduction as the premium is only 5% of the total sum assured. It is important to note that he may claim the deduction for the payment made in favour of his children irrespective of the fact whether his children are dependent or independent, major or minor and married or unmarried.
  • No deduction is applicable for the payment made in favour of any person other than the family (wife or husband, dependent children, parents, etc). Therefore, he cannot claim any deduction in this case.
  • Therefore, Rs. 55,000 shall be eligible for life insurance tax benefit in this case (Rs. 5,000+ Rs. 20,000 + Rs. 30,000 = Rs. 55,000).

(B) The taxpayer may claim a deduction for the payment made by him towards the provident fund or public provident fund (PPF). Mr Rajeev paid Rs. 60,000. Therefore, he may claim Rs. 60,000 deductions for the payment from the taxable income.

(C) The taxpayer may also claim the deduction in respect of the payment made towards NSC. Therefore, Mr Rajeev can claim Rs. 10,000 as a tax deduction in this case under section 80C of the act. The interest that he receives shall also be eligible for the tax deduction. Mr Rajeev received Rs. 1,000 interest on the payment of Rs. 10,000. Therefore, this Rs. 1,000 shall be eligible for tax deductions under section 80C of the act.

(D) The taxpayer can also claim the tax deduction for the amount paid towards tuition fees. However, this does not include the other fees (development fees, donations and other similar payments). The amount paid at the time of admission and after admission to the school, university college or other education institution shall be eligible for tax deduction under section 80C of the act. Mr Rajeev paid Rs. 5,000 in tuition fees. Hence, he may claim this amount for a tax deduction.

(E) The taxpayer can also claim the deduction for the amount paid towards the home loan. Mr Rajeev paid Rs. 12,000 for his home loan. Hence, he may claim the tax deduction for this amount under section 80C of the act.

(F) A taxpayer may also claim a deduction for the investment made in the post office. Mr. Rajeev paid Rs. 10,000. Therefore, he may claim this amount for the tax deduction under section 80C of the act.

Considering the above points given in (A) to (F), the total deduction amount is Rs. 1,53,000. (Rs. 55,000 for life insurance policy + Rs. 60,000 for public provident fund + Rs. 11,000 for NSC + Rs. 5,000 for tuition fees + Rs. 12,000 for home loan + Rs. 10,000 for post office = Rs. 1,53,000)

However, one may only claim Rs. 1,50,000 during a financial year under section 80C of the Income Tax Act of 1961, Therefore, Mr Rajeev can only claim Rs. 1,50,000 out of Rs. 1,53,000.

Deduction vs. Exemption

A policy buyer must understand the difference between deduction and exemption. Many people term these two words as the same and consider them as synonyms of each other. However, this is not true. There are differences between both the terms that one should understand.

  • A deduction reduces the taxable income. Whereas, exemption excludes sometimes income from taxation.
  • A deduction applies to a range of expenses. Whereas exemption applies to some type of income.
  • A deduction is applicable under sections 80C and 80CCC. At the same time exemption is applicable under section 10 (10D) of the act.

Both deduction and exemption are life insurance tax benefits under the Income Tax Act of 1961.

Conclusion

Life insurance in India is not just a tool for financial protection. It is an instrument for tax planning. Many sections of the Income Tax Act offer deductions and exemptions for premiums that the policy buyer pays. This makes life insurance an important part of a comprehensive financial strategy. As a responsible policyholder, it is important to stay informed about the evolving tax regulations and the life insurance tax benefits. The policy buyer must consult a financial advisor before making his financial decision to buy the life insurance policy. This is because there are many conditions where the policy buyer cannot claim the life insurance tax benefit for the policy purchased for a person other than his family.