Life insurance: Ideal tool for tax saving, financial security

Tags: Insurance
Life insurance provides a twin benefit to persons by providing financial security in case of contingency besides being a tax-saving instrument. The income-tax authorities also recognise the importance of taking a life insurance policy and have correspondingly provided income-tax benefits to an individual and Hindu undivided family (HUF) on the same under the Income-Tax Act, 1961 (the Act).

Though the benefits of taking a life insurance policy are manifold, the tax benefits from the same can be broadly classified into two categories. First, the tax benefit available at the time of premium payable to keep the life insurance policy in force. The second benefit at the time of the amount being received under the insurance policy on its maturity or on the happening of the contingency.

Tax deduction in respect of premium: Deduction under Section 80C of the Act is available in respect of the premium paid on life insurance policy in a financial year. The maximum amount of deduction that can be claimed is up to Rs 1,00,000 or the amount paid, whichever is less. It is important to note that such deduction can be claimed by an individual in respect of premium paid towards life insurance for self, spouse and any child of such individual. In case of a HUF, the premium should have been paid for any member of the HUF.

In order to avail the aforementioned deduction, the individual / HUF should ensure that the premium payable for such life insurance policy should not be more than 20 per cent of the actual capital sum assured. It has been clarified that the while calculating the actual capital sum assured, the following should not be taken into account: Firstly, the value of any premium agreed to be returned, or, secondly, any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.

However, in budget 2012, it has been proposed that the deduction in respect of life insurance premium (for policies issued on or after April 1) shall be allowed only if the premium payable does not exceed 10 per cent of the actual capital sum assured. This limit is proposed to be reduced from the existing limit of 20 per cent.

Caution points: It is important to keep in mind that in case the individual / HUF terminates the life insurance policy by notice to that effect or where such policy ceases to be in force by reason of failure to pay premium or by not reviving the same within the specified time, then no deduction shall be allowed under Section 80C in that particular year. The aggregate amount of deductions allowed in respect of the same in the previous financial years would be deemed to be considered as the income of the individual / HUF of those previous financial years and shall be liable to tax in the present financial year.

Amount received at the time of maturity or contingency: As per Section 10(10D) of the Act, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, is exempt from income tax, subject to the conditions specified therein.

In budget 2012, it has been proposed that maturity proceeds from life insurance policies (issued on or after April 1) would be exempt under Section 10(10D) of the Act only if premium does not exceed 10 per cent (as against 20 per cent for policies issued up to March 31) of the actual capital sum assured.

Even though taking a life insurance policy is not mandatory, individuals should recognise the need and importance of the same besides availing the income-tax benefits associated with the same.

(The writer is partner – tax

at KPMG. The views are personal)

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