Section 80C & Sec 10(10D) : Life Insurance Premium Deduction & Exemption

There are various options available for making Investment. But as a taxpayer, we always try to find an option that helps to save our taxes and at the same time gives our family financial cover. This article will discuss one of that Investment, the Life Insurance Policy, from a taxation perspective. In this article, we will talk over how we can save our taxes by buying a life insurance plan, TDS by the Insurance Company, Treatment of maturity proceeds in the hand of the taxpayer or nominee, and the Implication of surrendering policy before maturity. 

Life Insurance Premium

Deduction under Sec 80C

To save taxes, various Investment choices available to Individual and HUF under Sec 80C like PPF, NSC, EPF, tuition Fees, ELSS, Unit-linked Insurance plan (ULIP), Home Loan principal repayment, Sukanya Samriddhi Yojana, Life Insurance, etc. Under this tax-saving section, you can claim a maximum deduction of Rs. 1,50,000 (along with deduction u/s 80CCC & 80CCD). These deductions are available only on a paid basis.

The premium paid on Life Insurance product or ULIP is allowed as a deduction. However, there is some restriction on the amount of premium allowed as a deduction.

If the policy is taken between 1 April 2003 to 31 March 2012, you can claim a premium up to 20 percent of the sum assured as a deduction subjected to a maximum of Rs. 150000. It means If you paid a premium of more than 20 percent, you could only claim a deduction of 20 percent of the sum assured, which is not more than the overall limit of sec 80C (along with deduction u/s 80CCC & 80CCD).

If the policy is taken after 31 March 2012, you can claim a premium up to 10 percent of the sum assured as a deduction subject to a maximum of Rs. 150000.

If the policy is taken after 31 March 2013 for a person covered under Sec 80U and 80DDB, you can claim a premium up to 15% of the sum assured as a deduction subject to a maximum of Rs 150000.

We can also summarize the same as:

Deduction of premium
Policy Issued For a person covered under 80U and 80DDB Other Person Remark
From 01.04.2003 to 31.03.2012 Up to 20% of Sum assured Up to 20% of sum assured Maximum 150,000 (covering all the investment made under Sec 80C along with deduction u/s 80CCC & 80CCD)
From 01.04.2012 to 31.03.2013 Up to 10% of sum assured Up to 10% of sum assured
After 31.03.2013 Up to 15% of sum assured Up to 10% of sum assured

 For Whom deduction is allowed

In the case of an Individual, a deduction of the premium is allowed only for self, spouse, and children. Children, whether married, unmarried, dependent, independent does not matter in this case.

In the case of HUF, a deduction of the premium is allowed only for HUF members. 

Exemption under section 10(10D)

When the premium paid on the Insurance policy does not exceed

i) 10 percent of the sum assured for policies issued after 31 March 2012,

ii) Similarly, 20 percent in case policy is taken between 1 April 2003 to 31 March 2012 and

iii) And 15 percent in case policy is taken after 31 March 2013 for a person covered under section 80U and 80DDB

the maturity proceeds or bonus amount received on maturity is fully exempt. 

Surrendering Policy Before Maturity

If the policy is surrendered before maturity, then its value is exempted under sec 10(10D) provided two of these conditions are satisfied:

(i) The premium paid does not exceed 10% (policy taken after 31 March 2012), 15% (policy taken after 31 March 2013 for a person covered under 80C and 80DDB), and 20% (policy has taken between 1 April 2003 to 31 March 2012) of the sum assured and,

(ii) A. If the plan is a traditional plan like an endowment plan, money back plans, the premium has successfully paid for the first two years.

(iii) If it is a single traditional plan, the policy is surrendered after completing the first two years.

(iv) If it is ULIP, then the policy is surrendered after five years.

If both of the above conditions are fulfilled, then the surrendered value is also exempted under 10(10D).

TDS by Insurance Company

The insurance company is liable to deduct TDS @ 5 percent on net maturity proceed (sum assured – premium paid). If the premium paid is

i) more than the 10% (policy taken after 31 March 2012), 15% (policy taken after 31 March 2013 for a person covered under 80C and 80DDB), and 20 % (policy has taken between 1 April 2003 to 31 March 2012) of the sum assured and,

ii) the maturity proceeds exceed 1 lakh rupees.

For example, Mr. X takes Life Insurance Policy on 1 April 2015 for which he paid a premium of Rs.15000 per annum for five years, and on maturity, he received Rs.120000. Now the question is whether the Insurance company is liable to deduct TDS. If yes, then how much?

Yes, The Insurance company is liable to deduct TDS as two conditions are satisfied

The premium amount is more than 10 percent of the sum assured (as the policy is taken after 31 March 2012) and,

the maturity proceeds exceed 100000.

The Insurance company deducts TDS @5% on Rs. 45000 (120000-15000*5), i.e., 2250. 

Taxability in the hand of the taxpayer

The premium, which was taken as a deduction in earlier years, is reversed and added to that year’s income of a taxpayer. If the Insurance policy is surrendered before paying the premium of the first two years (traditional plan) or,

completion of two years (single premium plan) or,

five years (ULIP).

If the exemption under section 10(10D) is not available, then the net maturity proceeds taxable under the other sources, and the slab tax rate is applicable on the same.

If it is exempt under section 10(10D), then the same is reported in ITR form as an Exempted income.

Taxability in the hand of the nominee of the taxpayer

The Insurance claim received by a nominee on the taxpayer’s death is always exempted in the nominee’s hand under section 10(10D) even if the premium paid is more than the prescribed percentage of the sum assured as discussed above.

Author Bio

Qualification: CA in Practice
Company: S CHAUDHARI AND COMPANY
Location: Madhya Pradesh, IN
Member Since: 20 Sep 2020 | Total Posts: 2

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