Income Tax Benefits on Life Insurance Premium expenses - Rules & Conditions

life insurance premium expenses

Section 80C of the Income Tax Act has provisions for tax deductions on payment towards Life Insurance premium on policy(s) bought in the name of self, spouse or children. Taxpayers can avail deductions upto Rs 1.5 lakhs within the overall limit of Section80C.

What is Life Insurance?
Life insurance can be defined as a contract, in the form of a policy, wherein an insurance provider undertakes to provide financial coverage to an individual in exchange for a payment over regular periods of time called a premium. The insurance provider will offer a lump-sum amount to the beneficiaries or nominees of a policyholder in case of his / her untimely death. This payment will include the sum assured, which is the amount you have purchased the policy for, and the minimum amount of money that the company will pay you before adding bonuses. Apart from the death benefit, a life insurance policy also offers maturity benefits in the form of payouts in case the policyholder survives the entire policy term. In addition, life insurance policies are also known for delivering tax benefits under Section 80C of the Income Tax Act, 1961.

As per Section 80C(2) of the Income Tax Act, 1961, any amount paid to an insurer to buy or to keep a life insurance policy in force can be claimed as a deduction from gross total income by the policy holder. This implies that premium paid for a life insurance policy can be deducted from gross total income before arriving at taxable income subject to certain conditions.

If you want to save on taxes, then there are numerous life insurance policies that provide an opportunity to save bundles on taxes. While choosing one, you need to consider the tax implications of taking a life cover too. Moreover, it also enables you to save and invest your hard earned money in order to reap the maximum benefits.

Tax Benefits provided to Life Insurance Premium

Section80C Benefits - Premium paid towards a life cover taken with any insurer that is approved by the Insurance Regulatory and Development Authority of India (IRDAI), is eligible for Section 80C deduction subject to a maximum of Rs 1.5 lakhs in a financial year.

Tax Free Returns - Maturity amount received plus any bonus (i.e. the policy proceeds) is Tax Free and exempted under section 10(10D) subject to certain conditions and exceptions.

Rules for claiming Benefit on Life Insurance Premium

Who can claim?
- Tax benefits can be availed by an individual or a HUF taxpayers.

Policy only in name of Self, Spouse or Kid(s)
- Individual can claim benefit on life insurance policy(s) bought in the name of self, spouse or children.
- You can buy a life insurance policy for any number of your children irrespective of whether they are minor, major, married, unmarried or adopted.
- In case of a "HUF", the policy can be taken in the name of any of its members to avail the tax benefits.

Number of Policies allowed
- No restriction on number of policies.
- Premium paid toward more than one policy is allowed subject to maximum of Rs 1.5 lakhs.

Where to buy Life Insurance Policy?
- An insurance policy can be bought from any public or private insurance company approved by the Insurance Regulatory and Development Authority of India (IRDAI).
- There is a myth that "A life insurance policy taken from LIC alone qualify under section 80C". This is not true, One can claim tax benefits on a life insurance policy bought from any insurer - private or public sector - approved by the IRDAI.
- Furthermore, it is important to note that insurance policies purchased from foreign insurers will have additional conditions that will vary from case to case.

How to Pay Premium?
- Premium can be paid via any method such as by cash, via cheque, account transfer etc in order to claim the 80C benefit. 
- Premium can be paid Quarterly, Half Yearly or on Yearly basis as per your policy terms.

How to claim the tax exemption?
- The person would need to submit premium receipt for the payment made during the financial year to their employer. 
- Few employers even employees to submit Policy document along with the premium paid receipt.
- For an Individual other than salaried employee, you would have to claim the deduction under VI-A schedule by showing the amount of premium paid under section 80C in the income tax return.

Premium paid can be claimed as deduction under section 80C only in FY in which paid
- In order to claim the deduction from gross total income for a particular year, the gross amount of premium must be paid or deposited in that particular financial year itself. 
- The premium must be paid between 1st April and 31st March (both dates inclusive) in order to claim the deduction for that FY.

Maximum Premium vs Sum Assured allowed for deduction
- Life insurance policy issued on or before 31.3.2012 - In order to claim 80C deduction, the premium paid should not exceed 20% of the sum assured and the premium paid in excess of this amount cannot be claimed as deduction. 
- For policies issued on or after 1.4.2012, the above mentioned limit of 20% has been changed to 10%. To claim deduction under section 80C the premium paid should not exceed 10% of the sum assured as the premium paid in excess of this amount cannot be claimed as deduction.
- In case the insured suffers from severe disability or disease as specified by the Income Tax Act and rules and his/her policy was issued on or after 1.4.2013, then for them the limit of 10% will be increased to 15%.

"Sum assured" simply means the minimum amount assured under the policy to the survivor. This amount does not include premium which has been agreed to be returned or any payment of bonus on the policy.

Minimum Lock-in period
The minimum time period for which the policy must be held by the policy holder in order to retain tax benefits on premium paid are:
- In case of single premium life insurance policy - 2 years from date of commencement of policy.
- In case of any other life insurance policy - at least 2 years, for which premium has been paid, from start of policy.

Premature Closure
If the policyholder surrenders his policy voluntarily or in case his policy is terminated by the insurer before a predefined time limit, on failure to pay the dues (i.e. premiums) , then the benefits under section 80C on premium paid for that policy would not be available to him. This means that:
- No deduction will be allowed to him for the premium paid for the year in which the policy is surrendered/terminated.
- The deductions claimed in earlier years for premium paid, if any, will be considered as his income in the financial year in which his policy is surrendered or terminated (as explained above) and taxed accordingly.

Maturity and Payout
As per Section 10(10D) of the Income Tax Act, 1961 the amount of sum assured plus any bonus (i.e. the policy proceeds) paid on maturity or surrender of policy or on death of the insured are completely tax free for the receiver subject to certain conditions.

Tax Free Maturity - Amount received on maturity of a life insurance policy or amount received as bonus is fully exempt from Income Tax under Section 10(10D) under following conditions:

  • For Life insurance policy issued on or before 31.3.2012 - Premium paid on the policy should not exceed 20% of sum assured for policy.
  • For Life insurance policy issued on or after 1.4.2012 - Premium paid on the policy should not exceed 10% of sum assured for policy.
  • For Life insurance policy issued on or after 1.4.2013 where insured suffers from severe disability or disease - Premium paid on the policy should not exceed 15% of sum assured for policy.
  • However, in case of death of the insured, where his nominees receive the policy proceeds the same shall be tax free in the hands of the nominee(s) even if premium paid in any year crossed the prescribed percentage of sum assured.

No exemption from income tax on the maturity of policies - Amount received on maturity of a life insurance policy or amount received as bonus, the whole proceeds from the policy would get taxed in the year of receipt under following conditions:

  • For Life insurance policy issued on or before 31.3.2012 - Premium paid in any year on the policy exceeds 20% of sum assured for policy.
  • For Life insurance policy issued on or after 1.4.2012 - Premium paid in any year on the policy exceeds 10% of sum assured for policy.
  • For Life insurance policy issued on or after 1.4.2013 where insured suffers from severe disability or disease - Premium paid in any year on the policy exceeds 15% of sum assured for policy.

In this case, any sum received (only if these proceeds exceeds Rs 100,000) by an insured Indian resident from an insurer under a life insurance policy shall be subject to TDS @ 2%.