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Taxation issues in Single Premium Life Insurance Plans

Last Updated: Jul 10, 2018 | 1,690 Views

Single Premium Life Insurance Plans have taxation issues

A lot of us buy life insurance plans just for saving tax. And in the year-end hurry a lot of us buy single premium life insurance plans to reach the 1.5 lakhs investment limit in a year. But this has a BIG problem.

Single premium life insurance plans are not always very tax efficient. You get 2 types of tax benefits in life insurance:
Tax benefits on the premiums paid under Sec 80C
No tax on the maturity benefit or the death benefit under Sec 10(10D)

What you need to check - Is the premium you are paying greater than 10% of the Sum Assured in the plan?

If YES, your premiums will not be completely eligible for the tax rebate under Sec 80C. And to make it worse, the maturity amount will be completely taxable.

So let us understand this with the help of an example.

Suppose, you buy a single premium life insurance as follows:

Sum Assured - Rs. 5 lakhs
Term - 10 years
Premium - Rs. 1 lakh

Now let us see the implications for both the premiums and the maturity values from a tax benefit perspective.

Sec 80C - The entire Rs. 1 lakh will not be tax free. Only Rs. 50,000 will be eligible for the tax benefit (10% of the Sum Assured)

Sec 10(10D) - Your entire maturity benefit will be taxable.

So be very careful when buying a single premium life insurance plan. Always check if you are getting a sum assured of at least 10 times the premium paid by you.

If you have any questions on this, please comment below and we will be happy to help.

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