Insurance is popular not only for its benefits but also for its tax-saving nature. Whether you buy life insurance or health insurance you get tax savings on both. In fact, in a life insurance policy, even the surrender value is tax-free in your hands. However, when it comes to taxation, there are certain rules which should be kept in mind. For health insurance plans there are limits up to which you can claim a tax exemption. Furthermore, for the surrender value of a life insurance policy, there are certain conditions that, if fulfilled, will result in tax relief. Let’s explore these tax facts of your health and life insurance plans –
Tax benefit for health insurance:
Premiums paid for a health insurance policy qualify for tax exemption under Section 80D of the Income Tax Act. The maximum exemption which you can claim for the premiums paid is up to INR 1 lakh. You can also claim upto INR 5000 of the limit for preventive health check up.
Here’s how –
| Members covered | Deduction limit | Total deduction available |
| Self, spouse, dependent children when you are less than 60 years old | INR 25,000 | INR 25,000 |
| Self, spouse, dependent children when you or your spouse is 60 years or more | INR 50,000 | INR 50,000 |
| Self, spouse, dependent children when you are less than 60 years old
And, Dependent parents when they below 60 years of age |
INR 25,000
+ INR 25,000 |
INR 50,000 |
| Self, spouse, dependent children when you are less than 60 years old
And, Dependent parents one or both of whom are aged 60 years or above |
INR 25,000
+ INR 50,000 |
INR 75,000 |
| Self, spouse, dependent children when you are 60 years or above
And, Dependent parents one or both of whom are above 60 years |
INR 50,000
+ INR 50,000 |
INR 1 lakh |
So, if you and your dependent parents are both senior citizens and you pay premiums for the coverage of your dependent parents too, you can claim a maximum tax exemption of INR 1 lakh in one year.
Tax benefit for life insurance
In the case of life insurance policies, there are different tax-saving stages that you should know about. So, let’s assess the tax-saving benefits of each stage in detail –
Tax benefit on the premium paid for a life insurance policy
The premium that you pay for a life insurance policy is allowed as a deduction from taxable income. This deduction is allowed under Section 80C of the Income Tax Act, 1961. The limit of deduction that you can claim is lowest of the following –
- The actual amount of premium paid
- 10% of the sum assured
- INR 1.5 lakhs
Here are some examples to help you understand the tax benefit that you can claim on the premium paid –
| Case 1 | Case 2 | Case 3 |
| Sum assured – Rs.10 lakhs
Premium paid – Rs.75,000 |
Sum assured – Rs.10 lakhs
Premium paid – Rs.1 lakhs |
Sum assured – Rs.10 lakhs
Premium paid – Rs.2 lakhs |
Tax deduction available would be lowest of the following –
Tax benefit available – Rs.75,000 |
Tax deduction available would be lowest of the following –
Tax benefit available – Rs.1 lakh |
Tax deduction available would be lowest of the following –
Tax benefit available – Rs.1 lakh |
So, in other words, the actual premium paid is allowed as tax deduction provided it is up to 10% of the sum assured. The maximum limit allowed under Section 80C, however, is limited to Rs.1.5 lakhs.
If you buy a pension plan, the same tax benefit is allowed on the premium that you pay. However, the tax benefit section changes from 80C to 80CCC.
Tax benefit on the death benefit received from a life insurance policy:
The death benefit received from a life insurance policy is always allowed as a tax-free income, irrespective of the premium amount.
Tax benefit on the maturity benefit received from a life insurance policy:
The maturity benefit received from a life insurance policy, except a pension plan, including any bonus additions, guaranteed additions, loyalty additions, etc., is tax-free under Section 10(10D). This tax benefit is available only if your premium is up to 10% of the sum assured. If the premium exceeds 10% of the sum assured, the maturity benefit would become fully taxable in your hands.
In the case of unit-linked insurance plans, if the aggregate premium paid for all unit-linked policies in your name is up to Rs.2.5 lakhs in a financial year, the maturity benefit would be tax-free. Here also, the premium should be within 10% of the sum assured to avail of the tax benefit.
If, however, the aggregate premium exceeds Rs.2.5 lakhs, the maturity benefit would become taxable. The maturity benefit would attract equity or debt tax, like a mutual fund scheme, depending on the fund that you selected when investing your premium. Here’s how –
- If you invested in an equity fund, the returns earned from the unit-linked policy, i.e. the maturity proceeds less the aggregate premium paid, would be tax-free up to INR 1 lakh. If, however, the returns exceed INR 1 lakh, the excess returns would be taxed at 10%. For example, say you invest INR 3 lakhs every year in a 10-year ULIP. On maturity, you receive INR 40 lakhs as the maturity benefit. The return earned from the policy is INR 40 lakhs (maturity benefit) – INR 30 lakhs (total premium paid) = INR 10 lakhs.
This return exceeds INR 1 lakh by INR 9 lakhs. This excess return would, thus, be taxed at 10% and your tax liability would be INR 90,000. If, however, the premium was limited to INR 2.5 lakhs, the entire maturity amount would have been tax-free in your hands.
- If you invest in a debt fund, the returns earned would be taxed at 20% with indexation benefit. This indexation benefit adjusts the returns with inflation and brings down your tax liability.
Tax benefit on the maturity proceeds of an annuity policy
In the case of pension plans, the annuity that you receive is taxable at your income tax slab rates. However, in the case of deferred pension plans, there are tax benefits on maturity.
On maturity, the deferred pension policy allows you to withdraw up to 60% of the accumulated corpus in a lump sum. This is called the commutation of pension. If you opt for the commutation, you get tax benefits on the money withdrawn. Up to 1/3rd part of the corpus that you commute is allowed as a tax-free income in your hands. The remaining corpus that you withdraw, however, would be taxed at your income tax slab rates.
Tax benefit on the surrender value of a life insurance policy
If you surrender your life insurance policy and avail of the surrender value, the value can be claimed as a tax-free income. However, to avail of this tax exemption, you have to fulfill the following conditions –
- For your single premium policies, if you surrender the policy after the first two years of buying the plan, the surrender value you receive is tax-free.
- If you have a regular premium plan, the surrender value is tax-free only if you have paid the premiums for the policy for at least 2 full years.
- In the case of Unit Linked Plans, the surrender value becomes tax-free only if the policy is surrendered after 5 years.
- For your pension plans, the surrender value is always taxable. It is taxed at your income tax slab rate in the year in which you receive the value.
So, if you want to surrender your life insurance policy, find out the type of policy you have. Then determine whether the qualifying conditions have been fulfilled so that you can receive the surrender value without any tax implication.
Read more about the Life insurance policy in India – How it works?
Tax is a complicated subject where there are various qualifying conditions and limiting amounts. Even though your life and health insurance plans promise you tax benefits you should read the fine print of availing of this tax benefit. You would not be in for a surprise when you know the tax relief you would get, right?
Turtlemint helps you in buying the best life insurance policy and health insurance policies. It also helps you with your queries regarding the tax aspect of these plans. So, if you are planning on investing in life insurance, health insurance, or both, come to Turtlemint. You would be surprised by the experience you get.
