One of the prominent attractions of Term insurance policies, apart from its protecting you from financial risks and uncertainties, is its ability to provide tax breaks on premium paid as well as on maturity benefit. While you secure the future of your family and loved ones, you also stand to gain when it comes to tax. Whether it is online term insurance or the regular term insurance that you have secured, tax is a major consideration. And it would help to know about tax implications in terms of premiums paid and with regard to maturity benefit before you get term insurance.
What is maturity benefit?Maturity benefit depends much on the kind of term insurance that you purchase. For instance, if you choose term plans when you get term insurance, you may not be eligible for any maturity benefit at all. It is a similar case with whole term plans as well, since whole term plans are all about insuring your life and does not provide any survival. You need to get term insurance that provides you with survival benefits, as in the case of unit linked plans, money back plans and child plans where there are fixed sums assured to be paid back at the end of agreed terms.Tax considerations when you get term insurance:
There are two aspects of tax that you should worry about, which are equally applicable to online life insurance as well as to life insurance that you buy through other avenues. You could claim tax benefits on premiums that you pay on your life insurance, as well as on the sum that you receive at the end of the term of insurance, which is typically known as benefit. The two provisions applicable are Section 80C and Section 10(10D) of the Income Tax Act, 1961. While section 80C applies to tax implications associated with life insurance premiums, section 10(10D) applies to tax.
Tax on maturity benefit:It may be the commonly prevalent opinion that benefit is completely tax free when you get life insurance. However, Section 10(10D) of the Income Tax Act, 1961, states that holders of life insurance would be eligible for tax benefits as long as the premium paid during a financial year is limited to 20 percent of the sum assured. It is a similar case with Section 80C as well, where you could claim tax benefits as long as the premium payable for the financial year is within the 20% limit of the sum assured.Maturity benefit when premium is skipped:This is one common question that arises when you get life insurance: if premium is skipped once and is combined together to be payable the next year, the insurance premium paid would exceed the 20% limit of sum assured. Would benefit still be tax free or would benefit on life insurance be taxable then?
To be sure, Section 10(10D) specifies that benefit would not be taxable as long as the premium payable during any financial year is less than 20 percent of the sum assured. It implies that it is not the premium paid but the premium payable that matters. Paying two premiums together in a year does not account to an increase in premium payable. Hence, if the sum assured is Rs 100,000 and if the premium payable at any point in time is less than Rs 20,000, maturity benefit on life insurance would be exempt from tax.
by Johan Dirano
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