3 Things You Need To Know On Tax Implications Of Life Insurance Plans
By - IndianMoney.com Research Team 26 August 2016
Why do you avail a life insurance plan? Is it to get tax benefits, or is it to provide for your family, on an untimely demise? Let’s face it….You and most of our citizens, avail life insurance, simply to save on tax. This move often ends in disaster. You land up availing an endowment life insurance plan or a ULIP, which charges very high premiums. The risk cover provided, is very less in these plans. A large part of the premium you pay, goes in commissions to the life insurance agent, who sells you the life insurance plan. Believe me….The life insurance agent, loves to sell you these life insurance plans. In India, life insurance is never bought. It is almost always sold. Never mind. You have already availed an endowment life insurance plan and a ULIP. So read these rules on life insurance carefully, before you avail a life insurance plan.
Is premium paid on life insurance plans tax deductible?
It is often believed that the entire life insurance premium you pay, is tax deductible under Section 80 C of the income tax act. This is not true… If your life insurance plan was issued after April 2012, the deduction on the premium you pay, is limited to just 10% of the sum assured of the life insurance plan. Find this confusing….This example should dispel all doubts. You had availed a life insurance plan, paying a premium of INR 8,000, for a sum assured of INR 24,000, on May 2013. You get a deduction of only INR 2400 (10% of INR 24,000), on the premiums you pay for the life insurance plan. You will not get any deduction, on the remaining INR 5,600 of the life insurance premium, even under Section 80 C. Knowing this, most life insurers offer life insurance plans, where the premium is less than 10% of the sum assured of the plan.
Tax implications of surrendering a life insurance plan
You are fed up with your ULIP. You just want to surrender it. But your ULIP has a minimum holding period of 5 years. ULIP’s have a lock in period of 5 years. So what happens if you surrender the ULIP after 3 years? Simple….The income tax deductions you enjoyed for 3 years under Section 80 C, will be reversed. The tax deduction amounts you have claimed till now, will be added to your income and you will be taxed, as per the income tax slab you fall under. The tax deduction amounts you have claimed in the earlier years, will be added to your income, in the year you have surrendered the life insurance plan.
You want to avail life insurance for your parents
You get a tax deduction up to INR 1.5 Lakhs a year, under Section 80 C of the income tax act. You get this tax benefit, only if the premium of the life insurance plan is paid for yourself, spouse and kids. You do not get tax benefits, on the life insurance premium you pay for your parents, your in-laws or even your siblings.
Yes…you do get tax benefits, if you avail a life insurance plan. But… this blog helps you understand, when you can get these tax benefits.
Under : Financial Planning