Life Insurance Policy Tax Exemptions - Section 10(D)

This month, one of my old life insurance policies with LIC, which my dad had subscribed for me when i was young, got matured and i received the final amount with bonus in my bank account. While it always feels exciting to receive such amounts in your bank account, it was important for me to understand the tax implications for the same as well.

There is a general perception amongst the taxpayers that all premiums paid for Life Insurance is eligible for deduction under Section 80C subject to overall limit of Rs.1.50 Lacs. Further, it is also a misconception that all sums received from the insurance company against your life insurance policy is exempted under section 10(10D).
The main reason behind such misconceptions is that on every Insurance policy or premium receipt , there is a disclaimer printed that Life insurance premium is eligible for deduction under section 80C and Maturity is tax free Under Section 10(10D). This is also widely publicized by various insurance companies to attract tax savers into buying life insurance.

Neither of the above statements is 100% correct. When the income tax authorities question you and ask you to justify your tax vs your income, you cannot defend yourself citing ignorance of law. Therefore, it is vital to understand the tax implications in such cases. Both, Sec 80C deduction as well as Sec 10(10D) exemption is available subject to some conditions. Let us discuss these conditions in a bit more detail.

These tax exemption does not apply to following amounts received during a specific financial year:

a) any sum received under an insurance policy issued on or after the 1st day of April, 2003  but on or before the 31st day of March, 2012  in respect of which the premium payable for any of the years during the term of the policy exceeds 20% per cent of the actual capital sum assured. Let us say that the sum assured of your policy is Rs. 10 Lacs. If you are paying a premium of more than Rs. 2 Lacs in any financial year of the policy, then you are not eligible for Sec 80C deductions for that premium or Sec 10D exemption for the payments recd from the insurance company on maturity or as bonus or otherwise.

or

b) on benefits you receive under life insurance policies issued on or after 1st April, 2012, shall be available only if the premium payable in any of the years is not more than 10% of the Sum Insured. The laws are even more stringent for new policies issued after 1st April 2012. The 20% premium limit is now brought down to 10%. One of the reasons for the same has been that there has been lot of top up premiums being paid by the investors

or

c) sum received under Section 80DD(3),

or

d) any sum received under a Keyman Insurance Policy.

However, the death benefit under your plan is always tax-free under sec 10(10D).

If you chose to discontinue a Unit Linked Insurance Plan before paying for 5 years from commencement of policy, you are not entitled to any tax benefits in the previous year in which the taxpayer terminates the plan .The quantum of deduction already taken in the preceding years would be deemed as the income of the taxpayer in the year in which policy is terminated.

So, be aware of the laws and be careful of the amount of premium that you pay every year compared to the sum assured if you want to avail the tax benefits under Section 80C and Section 10D.

Cheers

Manoj Arora