There is General Perception to taxpayers that All premiums paid for Life Insurance is eligible for deduction under 80C subject to overall Limit of 1.50 Lacs .Further there is misconception that all money received from Insurance Company against Life insurance Policy is exempted from Income tax under section 10(10D). There are number of reasons behind it ,it may be due to ignorance and mis selling by insurance companies ,Lack of awareness of recent Changes in Income Tax Act,and General remarks given on every Insurance Policy or premium receipts ,that
Life insurance premium is eligible for deduction under section 80C and Maturity is tax free Under Section 10(10D).
But this is not 100% correct under Current Taxation Rules as deduction under section 80C as well as exemption under section 10(10D) is available subject to some conditions.What are these conditions ? We will cover this topic in Two post ,In present post we are discussing various condition and rules under Section 80C for Life insurance Premium and in other post we have covered Income tax exemption of Life insurance maturity amount and conditions as section 10(10D) of Income tax act.
- 1.Who is eligible for Life Insurance Premium deduction 80C and On whose Name
An Individual or an HUF only can claim deduction for Life Insurance Premium paid. (Resident or Non resident Both)
An Individual can claim deduction for Life Insurance Policy on life of himself, his spouse or his children.
So as a parent you can claim tax benefits for life insurance premium of your children whether dependent or independent ,married or not married ,Major or Minor but reverse is not true and thus children can not claim tax benefits in respect of life insurance premium paid on life of parents.
The HUF can claim deduction for premium on life of any of its members.
Now take this Quiz
"Whether life insurance premium paid on the life of following is eligible u/s 80C ?"
- Dependent Father/Mother.
- Dependent Brother /Sister.
- Spouse (wife/Husband)
- Minor Son/Daughter.
- Major Son (Income more than 2 Lakh)
- Major Dependent Children.
- Married Daughter.
To check the answer Like us on Facebook or Twitter and then Lock will be opened.Before going in to the details ,please select your options and check your understanding with the income tax provisions of Section 80C with respect to life insurance Premium ?
Relevant provision of Income tax : Provision are very precise,compact and simple and without any confusion and given below.
(a) for the purposes of clauses (i), (v), (x) and (xi) of that sub-section,—(i) in the case of an individual, the individual, the wife or husband and any child of such individual, and(ii) in the case of a Hindu undivided family, any member thereof;
So Individual can pay life insurance premium on the policy of following
- On himself
- On Wife/husband(dependent or not)
- Major or minor
- Earning any income or dependent
- Married or unmarried
Though the act is very much clear yet to clarify the issue department has also issued circular on one of the aspect of the issue in the past.
Premium paid on policies in name of adult children - Relief under section 80C is available in respect of premia paid on the life insurance policies on the lives of adult children, irrespective of their status; for example, premia paid on a policy on the life of a married daughter. This relief will continue to be available under the new section (section 88) introduced by the Finance Act, 1990, as the language of the new section is in pari materiawith that of section 80C of the Act—Circular : No. 574, dated 22-8-1990.
However you can not claim deduction on life insurance policy taken on the life of
- Parents (mother or father)(dependent or not )
- Brother or Sister (dependent or not)
Same Rule applicable on three other investment types:"For the purposes of clauses (i), (v), (x) and (xi) of that sub-section"(given with yellow background above) It means that the same rule is applicable on four type of investment .
- (i) Life insurance premium as stated above
- (v) Public Provident Fund
- (x) UTI Unit linked insurance Plan 1971(as a contribution, in the name of any person specified in sub-section (4), for participation in the Unit-linked Insurance Plan, 1971 (hereafter in this section referred to as the Unit-linked Insurance Plan) specified in Schedule II of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002)
- (xi) as a contribution in the name of any person specified in sub-section (4) for participation in any such unit-linked insurance plan of the LIC Mutual Fund referred to in clause (23D) of section 10, as the Central Government may, by notification in the Official Gazette, specify in this behalf
- 2 Amount of Deduction under 80C on Life Insurance Premium.
Overall Limit : As you may aware of that Total Limit of deduction under Section 80C, 80CCC, 80CCD is Rs 150000 for Financial Year 2017-18. Under Section 80C various option of Tax saving scheme Like PPF ,GPF ,NSC ,House Loan repayment etc and few expenses Like Tuition fees ,Payment of Stamp duty for new House etc. has been allowed as deduction and Life insurance premium is one of them and covered under overall Limit of Rs 150000/-
Whether Full amount of Life Insurance Premium is allowed ? (Sec. 80C).
As per Section 80C(2) any sums paid or deposited in the previous year by the assessee—(i) to effect or to keep in force an insurance on the life of persons specified in sub-section (4); is allowed as deduction.
However Sub section(3) place restriction on amount of premium which is eligible for deduction as under
- If policy is taken before 01.04.2003 no restriction on eligibility and Full premium is eligible as as deduction
- If Policy is taken between 01.04.2003 to 31.03.2012 then only 20% of "Sum assured" is eligible for deduction
- If Policy is taken on or after 01.04.2012 then only 10% of "Sum assured" is eligible for deduction.
- However 15% of sum assured is allowed if person is disable as per section 80U or suffering from disease or ailment as per section 80DDB and policy is on or after 01.04.2013
Meaning of Sum assured
In calculating any such actual capital sum assured, no account shall be taken—
- (i) of the value of any premiums agreed to be returned, or
- (ii) of any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.
So for Insurance policies taken on or after 01.04.2012 per Section 80C premium paid only up to 10% of the sum assured is available for deduction . So to check the eligible amount of premium for deduction under Section 80C we have to consider following points
- When policy has been taken (date of Policy)
- What is the sum assured
- Premium Paid during the Year
Example 1:Arun has taken a Life Insurance policy on 01.04.2014 with a sum Assured 4 Lakhs and paid a Premium of Rs 60,000 in Financial Year 2017-18,What is the eligible amount under section 80C?
In this Case Arun is eligible to claim 10% of Sum Assured(4 lakh) i.e Rs 40,000 under section 80C. out of Total premium paid Rs 60000 during Financial Year 2017-18.
Further Above rule is applicable on policies issued on or after 01.04.2012(10%) and if the policy has been got issued between 01.04.2003 to 31.03.2012 then maximum 20% of sum assured would have been allowed . Moreover if Policy has been issued before 01.04.2003 then you can claim full premium paid under section 80C without considering 10%/20% Limit.
Impact of 10% rule of Various types of Insurance
Life Insurance Policy can be divided in following categories
- Term Insurance or Pure insurance
- Unit Linked Plans (ULIP)
- Traditional plan (Insurance plus Investment plan)
- Single Premium policies
- Pension Plans with zero sum assured
Term Plan : The 10 % rule is applicable on term plan also , however in case of Term plan sum assured is much more than 10 time of the premium paid in Financial year.
Unit linked plans and Traditional Insurance plans : In Both cases 10% rule applicable ,Further in case of ULIP ,Top up premium can also be deposited and 10% rule is applicable on TOP-up premium also.
Single premium Policy : Generally sum assured of Single premium policies are 1 time to 1.25 times of the premium paid ,so in such case eligible amount of premium eligible for deduction will be restricted up to 10% of sum assured only
Example : Rahul has taken a Single premium insurance policy and paid Rs 100000/- as premium during Fy 2017-18. Sum assured of the policy is Rs 125000/- . How much amount is eligible for deduction under section 80C ?
Ans: 10% of the sum assured (10% of 125000/-) i.e Rs 12500/- . So Rahul is allowed to claim deduction of Rs 12500/- only under section 80C for Life insurance premium paid.
Pension Plan with death benefit or zero sum assured :These plans are generally marketed by insurance company and understood as insurance policy and claimed as deduction under section 80C but actually these plans are covered under section 80CCC and 10% rule is not applicable on such plans .In few plans sum assured is zero even then they are eligible for deduction under section 80CCC. So Keep in mind this point that every paper /receipt issued by Insurance company is not always an Insurance policy.
- 3.Whether Deduction is allowed on Payment basis or due basis ?
All eligible scheme under section 80C is allowed only on the basis of payment/paid basis and no scheme is allowed on due basis. Sub Section reproduced here under
Example 2 : Ram has taken a Policy in March 2016 ,with sum assured as 2,00,000 and annual premium as 20,000.In March 2017 he had not deposit the premium and deposited the same in April-2017.What is eligible amount under section 80C if he pays March 2018 premium in Time ?
In present case even though the premium paid in Financial Year 2017-18 is related to two different Financial years ,yet deduction is allowed in the year of payment of premium .Further the restriction on maximum eligible amount under section 80C for Life insurance premium of 10% of sum assured is to be checked only on the basis of premium paid during the Financial year.,
In present case Ram has paid Rs 40000/- in Fy 2017-18 but he is not eligible to claim deduction on Rs 40000 in FY 2017-18 as the amount is restricted upto 10% of the sum assured. In this case 10% of sum assured is Rs 20000/- so Ram is eligible to claim deduction of Rs 20000 only.
So Be Alert if premium of your insurance policy is due in March, and your annual premium amount is around 10% of the sum assured then pay the premium in March 2018 it self ,otherwise you will have to face same problem as faced by Ram in above example.
- 4.Mode of Payment
Life insurance premium can be paid in Cash or through cheque/draft or through Internet Banking /Debit or Credit card or any other electronic mode.No restrictions has been placed under section 80C.
- 5. GST paid on Life insurance Premium allowed as Deduction ?
(2) The sums referred to in sub-section (1) shall be any sums paid or deposited in the previous year by the assessee—
- (i) to effect or to keep in force an insurance on the life of persons specified in sub-section (4);
- 6.Is there any Lock In period for Life insurance Premium
Lock in period has also been defined under section 80C sub section 5 for premium of Life Insurance premium . Assessee can not terminates contracts of Life insurance
- Single Premium:with in two year from the the date of commencement(start) of Policy in case of Single premium policy and
- In other case:In other case before payment of Two years Insurance premium .
- In Case of Unit Linked Insurance Plans premium has paid for 5 years.
If you violates above rules then deduction claimed in earlier years will be added in the Income of the previous year in which rules are violated.
Single Premium Policy : Two years after the date of commencement of insurance
Other Life Insurance Policy : Premiums Payment for Two years
Unit Linked Insu Plan(ULIP) : Premium Payment for Five years
Example 3 : Rajiv has taken a Life insurance policy in fy 2016-17 with sum assured Rs 5 lakh and annual premium of Rs 50000/- . He has claimed deduction of Rs 50000 in fy 2016-17. In Fy 2017-18 he has not paid the premium and has terminate the life insurance contracts and taken surrender value from Life insurance company ,what will be provision under section 80C applied in this case ?
In this case Rs 50000/- will be added back as Income of Rajiv in fy 2017-18 due to violation of Policy lock in period under section 80C as a reversal of Deduction claimed in earlier Financial year 2016-17.
- 7.Relevant abstract of Section
80C. (1) In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, in accordance with and subject to the provisions of this section, the whole of the amount paid or deposited in the previous year, being the aggregate of the sums referred to in sub-section (2), as does not exceed one hundred and fifty thousand rupees.
(2) The sums referred to in sub-section (1) shall be any sums paid or deposited in the previous year by the assessee—
(i) to effect or to keep in force an insurance on the life of persons specified in sub-section (4);
(3) The provisions of sub-section (2) shall apply only to so much of any premium or other payment made on an insurance policy, other than a contract for a deferred annuity, issued on or before the 31st day of March, 2012, as is not in excess of twenty per cent of the actual capital sum assured.
Explanation.—In calculating any such actual capital sum assured, no account shall be taken—
(i) of the value of any premiums agreed to be returned, or
(ii) of any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.
(3A) The provisions of sub-section (2) shall apply only to so much of any premium or other payment made on an insurance policy, other than a contract for a deferred annuity, issued on or after the 1st day of April, 2012 as is not in excess of ten per cent of the actual capital sum assured :
Provided that where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—
(a) a person with disability or a person with severe disability as referred to in section 80U, or
(b) suffering from disease or ailment as specified in the rules made under section 80DDB,
the provisions of this sub-section shall have effect as if for the words "ten per cent", the words "fifteen per cent" had been substituted.
Explanation.—For the purposes of this sub-section, "actual capital sum assured" in relation to a life insurance policy shall mean the minimum amount assured under the policy on happening of the insured event at any time during the term of the policy, not taking into account—
(i) the value of any premium agreed to be returned; or
(ii) any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.
(4) The persons referred to in sub-section (2) shall be the following, namely:—
(a) for the purposes of clauses (i), (v), (x) and (xi) of that sub-section,—
(i) in the case of an individual, the individual, the wife or husband and any child of such individual, and
(ii) in the case of a Hindu undivided family, any member thereof;
(b) for the purposes of clause (ii) of that sub-section, in the case of an individual, the individual, the wife or husband and any child of such individual;
(5) Where, in any previous year, an assessee—
(i) terminates his contract of insurance referred to in clause (i) of sub-section (2), by notice to that effect or where the contract ceases to be in force by reason of failure to pay any premium, by not reviving contract of insurance,—
(a) in case of any single premium policy, within two years after the date of commencement of insurance; or
(b) in any other case, before premiums have been paid for two years; or
(ii) terminates his participation in any unit-linked insurance plan referred to in clause (x) or clause (xi) of sub-section (2), by notice to that effect or where he ceases to participate by reason of failure to pay any contribution, by not reviving his participation, before contributions in respect of such participation have been paid for five years; or
(iii) transfers the house property referred to in clause (xviii) of sub-section (2) before the expiry of five years from the end of the financial year in which possession of such property is obtained by him, or receives back, whether by way of refund or otherwise, any sum specified in that clause,
(a) no deduction shall be allowed to the assessee under sub-section (1) with reference to any of the sums, referred to in clauses (i), (x), (xi) and (xviii) of sub-section (2), paid in such previous year; and
(b) the aggregate amount of the deductions of income so allowed in respect of the previous year or years preceding such previous year, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year.