Unlocking the Tax Advantages of Life Insurance Policies. Getting life insurance is important, especially if your family depends on your income. Even if your partner is working, having life insurance is like a safety net. It can’t replace the emotional loss, but at least your family won’t struggle financially.
So, what is life insurance? It’s like making a deal with an insurance company. You pay them some money regularly (called premiums), and in return, they promise to give a big sum to your family when you’re not around (that’s the death benefit). Or, if you live through the whole deal, you might get a payout at the end (that’s the maturity benefit).
In India, there are lots of companies offering many plans for different needs and ages. When picking a plan, don’t forget to think about how taxes might play a role. Life insurance not only provides security for your family but can also have some tax benefits.
Many people aren’t aware of how taxes work with life insurance. To make sure your loved ones get a good amount of money, it’s key to understand the tax perks of life insurance policies.
Unlocking the Tax Advantages of Life Insurance Policies
Life insurance can be beneficial when it comes to taxes. Let me break it down for you.
Tax Deductions with Section 80C
Every year, if you’re living in India, you can get a tax deduction of up to INR 1.5 lakhs for the premiums you pay for life insurance. This is under Section 80C of the Income Tax Act. It’s like a bonus on top of other things you might get deductions for, such as investments in things like Provident Fund, National Savings Certificate, or paying off your home loan.
Usually, you can get this deduction for premiums up to 10% of the total guaranteed amount. If you are dealing with a serious illness or disability, this limit goes up to 15%. But remember, anything you pay above these limits won’t get this tax benefit.
Tax Treatment with Section 10(10D)
Section 10(10D) decides whether the money you get back from your life insurance is tax-free or not. Good news is, if you get money due to someone’s death, it’s usually tax-free. However, if it’s a survival benefit (you’re still alive at the end of the policy), and the premium paid is more than 10% of the assured amount, the money you get back might be taxed.
For policies bought after April 1, 2012, this rule applies. If your yearly premium is less than 10% of the assured amount, you’re in the clear. But if it’s more, the amount you get back might be taxed based on your income
For policies between April 1, 2003, and March 31, 2012, the premium should be less than 20% of the assured amount for certain conditions like being disabled or having specific illnesses.
If your policy started before April 1, 2013, and the premium is less than 15% of the total assured sum, you usually don’t get taxed on the money you get back.
- Tax benefits apply to both Indian and international life insurance providers.
- Section 10(10D) tax benefits cover all types of life insurance payouts.
- There’s no maximum limit on the tax benefits you can get under Section 10(10D).
So, in simple terms, paying attention to these sections can save you money on taxes when it comes to life insurance.
TDS on life insurance policy
Since October 2014, here’s the deal with life insurance money: if you get more than Rs 1 lakh and your policy isn’t exempt under Section 10(10D), the insurance company will cut 1% as TDS (that’s like a little tax) before giving you the money. This also applies to bonus payments.
But, if you get less than Rs 1,00,000, they won’t cut anything upfront, but you still have to pay tax on the full amount. You can, however, get credit for the TDS when you file your Income Tax Return.
Now, there’s a change from September 1, 2019. The government says they might cut 5% as TDS on the money you get from your insurance policy. It’s like a little more tax, so keep that in mind.
Understanding the Tax Implications of Unit-Linked Insurance Policies
Let’s talk about how taxes work for Unit-Linked Insurance Policies (ULIPs). In the past, the money you put into ULIPs and the money you got back at the end were tax-free. But, there’s a new rule since February 1, 2021, for ULIPs bought after that date.
Here’s the deal: If you pay more than INR 2.5 lakhs as a premium every year for your ULIP, you won’t get any tax benefits on the returns. The money you make from such ULIPs is considered as capital gains, and you might have to pay taxes on it.
Now, life insurance is great for taking care of your loved ones, but it’s also smart to know about the tax perks. If you have a more expensive insurance policy, don’t worry too much. Look into the tax advantages before getting upset about the higher cost. The good news is, these tax benefits can come back to you as a deduction, which is like getting some money back. And who doesn’t love that, right?
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