Whenever you buy term insurance or any other life insurance plan, for that matter, you should not only go by the coverage and the premium payable. While these are essential aspects, and you can use a term insurance premium calculator for this purpose, you should also pay heed to the tax exemptions offered under life insurance. After all, in the untimely event of your demise within the policy period, the sum assured will go to your nominees. You would naturally want this to be free of taxes as much as possible in order to help them stand on their feet from a financial perspective.
While buying life insurance, we usually take deductions under Section 80C (up to Rs. 1.5 lakh on premium payments) and Section 80D (up to Rs. 25,000 (non-senior citizens) or Rs. 50,000 (senior citizens) on premium payments for health coverage under term insurance riders like critical illness) into account. However, closely examining the exemption aspect is also highly recommended. Understanding the Section 10 (10D) provisions is essential in this scenario. Here is a little more on the same for your benefit.
Section 10 (10D) Exemptions and How They Work
According to Section 10 (10D) guidelines, payouts by the life insurance company are exempted from taxes. However, the exciting bit is that both surrender values and other incentives are also included in the purview of this section. Any individual or their nominee can get tax-exempted lump sum payouts or accrued premiums earned through a life insurance claim under Section 10 (10D) in the form of death or maturity benefits. This is available for several kinds of policies and also applies to payouts from ULIPs with aggregate yearly premiums lower than Rs. 2.5 lakh for the entire policy term, subject to prevailing terms and conditions.
Here are some of the key points worth noting in this regard:
- If the insurance premiums paid throughout the policy term are not more than 20% of coverage for policies purchased between 1st April 2003 and 31st March 2012, then the policy will qualify for Section 10 (10D) deductions
- The premium should not surpass 10% of the insured amount if the policy is bought after 1st April 2012 to avail of these deductions
- The exemption on life insurance before 1st April 2013 should not cross 15% of the guaranteed amount in case the insured person is ill or seriously disabled. These disabilities are listed in Section 80U. The illnesses covered under this waiver are listed in Section 80DDB.
- Death benefits paid by a life insurance company are always exempted from taxes under Section 10 (10D)
What are the provisions pertaining to maturity benefits? Here’s looking at the same as well:
- The maturity payout should not be paid upon the insured’s death, and the benefit should be obtained for insurance as per Section 80DD (3) of the IT Act
- The money should not be covered under any Keyman Insurance Plan, nor can it be any annuity/retirement payout. It also cannot be obtained through any group insurance policy.
- For policies purchased between 1st April 2003 and the last day in March 2012, the insurance premium for a year cannot surpass 20% of the sum assured
- This limit is 10% for those policies bought after 1st April 2012
- The amount received will be subject to TDS (tax deducted at source) if the maturity value is not exempted under Section 10 (10D). If PAN is provided, TDS will be 10% of the maturity value, while it goes up to 20% if the PAN is not furnished.
- The proceeds are exempted from TDS in case the earnings do not exceed Rs. 100,000
- There are no upper limits on life insurance claims
Understanding these exemptions is vital before investing in life insurance. In addition, it will give you an idea of the various criteria for deductions. If in doubt, consult your financial advisor for a more in-depth overview of these taxation aspects under Section 10 (10D).