Updated for the last 5 years - Financial Year 2011-2012 to 2015-2016 Thi...
Many of us feel that the benefit amount we receive on maturity of life insurance policies are always tax-free. However that is not true, because not all life insurance policies will provide you a tax exemption on the maturity amount. Most of the Life Insurance Policies offer tax benefits on the maturity amount but not all of them are tax-free. There are some conditions which a life insurance policyholder has to fulfil after which the policy availed by him/her is eligible for tax benefits. The proceeds received on maturity of the life insurance policy will be exempted from tax if the following conditions are fulfilled in accordance with section 10(10)D of Income tax Act:
For all policies purchased after 1st April, 2012 the tax benefits would apply only if the Sum Assured is at least 10 times the annual income. This impacts not just the taxation on the maturity amount, but also has limited benefits on the tax breaks on the premiums paid. Single premium plans which you buy in a hurry at the end of the year to save tax are the ones which offer the least tax benefits. But a lot of people are not aware of this and regret later.
Let us understand this better with the help of an example.
Let us take the example of single premium plan. Just before the end of the financial year, you rushed and purcased a single premium plan for taxation purposes. The total premium paid is Rs. 1,00,000 and the cover you receive in this plan is Rs. 2,50,000. So clearly the amount of cover is not 10 times the premium paid in that year. So here is the impact.
Sec 80C - The entire premium amount you paid (Rs. 1,00,000) is not tax free. Only 10% of the cover amount is tax free. So you can claim tax exemption under Section 80C only to the extent of Rs. 25,000 and not the entire 1 lakh paid by you.
What makes it worse...
Sec 10 (10D) - You assume that the entire maturity amount is tax free as is the case with all life insurance policies. But NO, since the cover amount was NOT 10 times the premium you paid in a year, the entire maturity amount is taxable.
So it is a double whammy. Please be very careful when you buy life insurance plans, especialy single premium plans.
If you have any questions on this, please drop a comment and we will be happy to share our thoughts.