Personal Income-tax and Life Insurance.
The Income-tax Act, 1961, confers certain benefits on the tax payer who buys a Life Insurance Policy. The salient features of the important tax provisions concerning individuals and the benefits conferred on a Life Insurance Policy are discussed in this article.
1. The Income-tax Rates:
Net Income-Range | Rates of Income-tax |
Upto 50,000 | Nil |
50,000 to 60,000 | 10% of the amount by which the total income exceeds Rs.50,000 |
60,000 to 1,50,000 | Rs.1,000 plus 20% of the amount by which the total income exceeds Rs.60,000. |
1,50,000 and above | Rs.19,000 plus 30% of the amount by which the total income exceeds Rs.1,50,000. |
Surcharge:- No Surcharge for individuals where the Gross Taxable Income does not exceed Rs.8.50 Lakhs. Where it exceeds Rs.8.50 Lakhs a surcharge of 10% shall become payable.
2.The Standard Deduction:-
This is available only for Salaried employees and Pensioners as follows:-
Salary income before Standard | Amount of Standard Deduction |
(after deducting Profession Tax & Entertainment Allowance) | |
Upto Rs.5,00,000 | 40% or Rs.30,000, whichever is less. |
More than Rs.5,00,000 | Rs.20,000 |
3.Income-tax concessions for investments in Insurance Schemes:-
There are four forms of concessions available for investments in Life Insurance Policies:-
(a) Allowed as a deduction from the Gross Total Income.
(b) Allowed as a deduction from the Income-tax payable (Income-tax rebates).
(c) Exemption of Death Benefits from income-tax.
(d) Tax treatment of Survival Benefit, and Maturity and Pension benefits from income tax.
(a) Allowed as a deduction from the Gross Total Income:-
(i) Section 80CCC – Premiums under the Pension Plan of any Insurance Company
2. Some of the plans recognised for this purpose are ‘Jeevan Suraksha’ plan of LIC and ‘ICICI Forever’ Deferred Pension Plan of ICICI.
3. Premiums paid under this plan qualify for deduction upto a maximum amount of Rs.10,000 per annum from the taxable income.
(ii)Section 80D – Medical Insurance Premium
1. Available for the premiums paid under a Mediclaim Scheme of any Insurance Company.
2. Premiums paid, upto a maximum amount of Rs.10,000 per annum qualify for deduction from the taxable income.
3. A higher deduction of Rs.15,000 per annum is allowed for Senior Citizens- who have completed 65 years of age.
4. The Policy can be taken on the health of the individual, spouse, dependent parents or children only of the taxpayer.
(iii) Section 80DD- Premiums paid under a policy of any Insurer, which provides for maintenance of handicapped dependants
1. Premiums paid under ‘Jeevan Aadhar’ plan of LIC or any other similar Policy of any other insurance company for the maintenance of handicapped dependants qualifies for deduction.
2. The amount deductible is a fixed amount of Rs.50,000/- (Rs.75,000 where the dependant suffers from serious disability), irrespective of the premium amount paid under the policy. Where the dependant
(b) Allowed as a deduction from the Income-tax (Income-tax rebate)
Section 88:-
a) Premiums paid under any Life Insurance Policy issued by any Life Insurance Company is eligible.
Deduction from the Income-tax is calculated as follows:-
Employees having salary income of upto Rs.1 Lakh and whose salary income should be 90% of total income | Others If the Gross Income does not exceed Rs.1,50,000 |
30% of the premiums paid. | 20% of the premiums paid |
If the Gross Income exceeds Rs.1,50,000 but does not exceed Rs.5,00,000 | If the Gross Income exceeds Rs.5,00,000 |
15% of the premiums paid |
|
2. Rebate under Section 88 will be allowed on Life Insurance Premiums, only to the extent that the premiums paid in any year do not exceed 20% of the ‘Capital Face Amount’.
1. That portion of the premium which is in excess of 20% of the Capital Face amount will not qualify for rebate.
2. Premiums made under single premium policies and Limited Payment policies also will qualify only to the extent of 20% of the Capital Face amount.
3. Deferred Annuity Contracts are exempt from the above provision. Therefore under such contracts, the premiums payable may exceed 20% of the Capital Face Amount.
3. Premiums paid under a Life Insurance Policy is one among the many investments that are recognised by Section 88. Please take cognizance of any other investments which qualify for rebate. This means that if there are already some other investments which qualify for Section 88 rebate (like Housing Loan repayment, NSC, PPF etc.), then credit for premiums paid can be taken only for the balance amount.
For example, any payment towards cost of purchase/construction of a residential house is eligible under Section 88 upto a maximum amount of Rs.20,000 per annum. Therefore, where the tax payer has exhausted, say, Rs.10,000/- during the year, only the balance amount after deducting Rs.10,000/- will be available for tax rebate.
2. Where a policy is surrendered within 2 years, no tax rebate is allowed in the year in which it has been surrendered, for the premiums paid in the year of surrender. Besides, the tax rebate allowed for the Policyholder in the first year shall be cancelled and such tax rebate will be treated as tax due from the Policyholder in the second year.
© Exemption of Death Benefits from income-tax
Death Benefits payable under a Life Insurance Policy are exempt from Income-tax under Section 10(10D) of the Income-tax Act, 1961. However, any amount received under a Keyman Insurance Policy or under a Life Insurance Policy taken under Section 80D (eg. Jeevan Aadhar Policy of LIC of India) upon the death of dependant Life Assured, are not exempt.
(d) Tax treatment of Survival Benefit , Maturity and Pension benefits
Any Survival Benefit (periodical payments like under a Money Back Policy), amounts payable on Maturity (including bonuses thereon) are exempt from Income-tax under Section 10(10D) of the Income-tax Act, 1961 only if the premium paid during any year does not exceed 20% of the Actual Capital Sum Assured. Single Premium Policies where the premium paid is in excess of 20% of the Actual Capital Sum Assured will also not qualify for the exemption.
Pension payments are fully taxable on receipt basis.
Issue BG30 Sep03
