 "Don't buy life insurance merely for tax benefit")
Come the tax season and many of us will turn to an insurance agent. While insurance is supposed to provide a life cover, it still remains one of the preferred ways to save tax. It is not surprising, as life insurance is the only product other than Employees’ Provident Fund and Public Provident Fund that gives tax exemption while investing and at the time of maturity, that is, Exempt-Exempt-Exempt (EEE). The premiums paid are exempt under Section 80 C (within the overall limit of Rs 1.5 lakh) and the benefits received on maturity or death of the policy holder are exempt under Section 10 (10D) of the Income Tax Act. However, there are some cases where the exemption might not be available.
In the case of life insurance policies, if the death benefit is not 10 times the annual premium, it will not be eligible for tax exemption under Section 10 (10 D) or Section 80 C. “The basic sum assured, without any bonus, has to be 10 times the premium to be eligible for exemption under both sections,'' says Sanjeev Gokhale, a Mumbai-based chartered accountant. This rule was introduced in the 2012 Budget.
“Until the regulation was changed, the terms death benefit and sum assured were often used interchangeably. Now, companies specifically mention the two different terms. While by and large most policies follow these rules, there could be some single-premium, high-ticket policies where the death benefit is not 10 times the premium. The target segment for such policies is usually non-resident Indians, for whom taxation does not matter,” says A S Narayanan, director, Reach Ajcon Financial Advisors.
For older people, if the death benefits have to be 10 times the premium, the high mortality charges eat into the fund value. So, at maturity, the amount could be less. Hence, older people looking to buy single-premium policies to save tax might find the same expensive. In case of Unit Linked Insurance Plans (Ulips), the policyholder can choose the sum assured, which can be between four and 40 times the premium. Keep this fact in mind while buying a Ulip product.
According to Yateesh Srivastava, chief operating officer at Aegon Religare Life Insurance, buyers must look at tax-saving in a holistic manner before rushing to buy insurance for tax-saving purpose. “Examine your overall exemption limits and invest accordingly. This is the prudent thing to do,” he says.
At the moment, insurance offers EEE benefit under the proposed Direct Tax Code. However, this might be changed to Exempt-Exempt-Tax (EET), in which case the maturity proceeds will be taxable, Srivastava adds.
In the case of pension plans, while you will get tax exemption on the premiums paid under Section 80 C, you will be taxed on the maturity benefits. “At the time of maturity, only one-third of the benefit is allowed to be commuted without tax implication. But the rest of the maturity benefit is used to buy annuity. This annuity is taxed as income, according to your income bracket,” says Narayanan.
The premium paid on health insurance policies is also eligible for tax exemption under Section 80 D. Here, the limit is Rs 15,000 for self and Rs 15,000 for parents. In the case of senior citizens, the limit increases to Rs 20,000 for both self and parents. However, tax exemption is not available if the premium is paid by cash. It can be paid by any other mode —cheque, bank draft or net banking. “This could be aimed at reducing frauds. Otherwise, there is no way of knowing who has paid the money,” says an official from a private general insurance company.
In the case of life insurance policies, if the death benefit is not 10 times the annual premium, it will not be eligible for tax exemption under Section 10 (10 D) or Section 80 C. “The basic sum assured, without any bonus, has to be 10 times the premium to be eligible for exemption under both sections,'' says Sanjeev Gokhale, a Mumbai-based chartered accountant. This rule was introduced in the 2012 Budget.
“Until the regulation was changed, the terms death benefit and sum assured were often used interchangeably. Now, companies specifically mention the two different terms. While by and large most policies follow these rules, there could be some single-premium, high-ticket policies where the death benefit is not 10 times the premium. The target segment for such policies is usually non-resident Indians, for whom taxation does not matter,” says A S Narayanan, director, Reach Ajcon Financial Advisors.
For older people, if the death benefits have to be 10 times the premium, the high mortality charges eat into the fund value. So, at maturity, the amount could be less. Hence, older people looking to buy single-premium policies to save tax might find the same expensive. In case of Unit Linked Insurance Plans (Ulips), the policyholder can choose the sum assured, which can be between four and 40 times the premium. Keep this fact in mind while buying a Ulip product.
According to Yateesh Srivastava, chief operating officer at Aegon Religare Life Insurance, buyers must look at tax-saving in a holistic manner before rushing to buy insurance for tax-saving purpose. “Examine your overall exemption limits and invest accordingly. This is the prudent thing to do,” he says.
At the moment, insurance offers EEE benefit under the proposed Direct Tax Code. However, this might be changed to Exempt-Exempt-Tax (EET), in which case the maturity proceeds will be taxable, Srivastava adds.
In the case of pension plans, while you will get tax exemption on the premiums paid under Section 80 C, you will be taxed on the maturity benefits. “At the time of maturity, only one-third of the benefit is allowed to be commuted without tax implication. But the rest of the maturity benefit is used to buy annuity. This annuity is taxed as income, according to your income bracket,” says Narayanan.
The premium paid on health insurance policies is also eligible for tax exemption under Section 80 D. Here, the limit is Rs 15,000 for self and Rs 15,000 for parents. In the case of senior citizens, the limit increases to Rs 20,000 for both self and parents. However, tax exemption is not available if the premium is paid by cash. It can be paid by any other mode —cheque, bank draft or net banking. “This could be aimed at reducing frauds. Otherwise, there is no way of knowing who has paid the money,” says an official from a private general insurance company.