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Income Tax Benefits in Single Premium Life Insurance Plans
It is important to understand that all life insurance plans don’t have the same taxation rule. A lot of individuals invest in single premium plans thinking that they are eligible for tax breaks. It’s time to declare your investments in the company and you rush to buy a single premium life insurance plan thinking it will solve all problems - it DOES NOT.
Large number of individuals buy life insurance plans for the tax benefits they offer. Here we will understand how this exemptions works and more importantly when they do not work. We will limit our discussion mostly to life insurance products.
Important - All life insurance payments are not eligible for this exemption. Let us understand when the life insurance premiums are not tax exempted. In fact most single premium plans will not meet the criterion for tax breaks.
Current rule - If the premium paid in a year is more than 10% of the amount of cover, then the entire premium is not tax exempted. This problem typically arises when it comes to Single Premium Life Insurance Plans.
Rule of thumb - If premium being paid is greater than 10% of the Sum Assured of the plan, then the total premium is not eligible for tax exemption.
Let us see with the help of an example:
The annual premium for a plan is Rs. 35,000 and the amount of cover in that plan is for Rs. 1,75,000. In such a scenario, the entire Rs. 35,000 is not tax exempted. Only Rs. 17,500 (10% of Sum Assured) of the Rs. 35,000 will be tax free.
Also the Maturity Amount in this plan will not be tax free under Sec 10(10D). It will be completely taxable.
So be very careful when buying single premium life insurance investment plans. Check if the annual premium is less than 10% of the Sum Assured. Very often in Single Premium plans, this criterion is not met. So not only are the premiums not fully tax exempted under Section 80C, the maturity amount is also fully taxable.
No income tax on the Maturity Amount
This is covered under Section 10(10D) of the Income Tax Act. The maturity amounts in life insurance plans is completely exempt from tax. You do not have to include it into your income in the year that the plan matures.
Important - However, in case the premiums paid by you are greater than 10% of the Sum Assured in the plan, the entire Maturity Amount will be taxable. So be very careful when buying Single Premium plans where the premium is almost always greater than 10% of the Sum Assured. This is true for all life insurance policies purchased after 1st April 2012.
For policies purchased between 1st April 2003 & 31st March 2012, the insurance premium you pay in a year should be less than or equal to 20% of the Sum Assured in the plan. If this condition is not met, the entire maturity proceeds will be taxable income in the year that the policy matures.
The 10% rule is applicable for all life insurance plans. Just that most of the regular premium or limited premium payment plans meet this criterion. Single Premium plans often don’t - so be careful.
Hope you find this information useful. Happy to take any questions on this. Please add a comment and we will get back at the earliest.