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Income Tax Provisions For Life Insurance Products

Income Tax Provisions For Life Insurance Products

The life insurance market is overflowing with variety products like pure life insurance

, health insurance, children insurance plan, pension plan etc. giving you a wide spectrum to choose from. Life insurance is an amazing tax-saving tool and an indispensable part of an individual's financial planning exercise.

Income Tax provisions for different products of Life Insurance include

Section 80(C) of the Income Tax Act, states that a tax deduction up to Rs.1 lakh can be claimed by an individual on the premiums paid towards the life insurance policy.

Under section 80 CCC, an individual can claim deduction for the investment in certain pension funds up to Rs.1 lakh.

Section 80 CCD, allows deductions in respect of the individual's contribution to the New Pension Scheme (NPS).

Also under the Section 80 CCE, the total deduction that can be claimed under the Sec 80(C), 80 CCC and 80 CCD combined, cannot exceed Rs.1 lakh.

Premium paid against Health Insurance of family (which includes dependents - parents, self, spouse and children only) can also be claimed for tax rebate under Sec 80(D). The tax rebate under this section is limited to Rs.35,000 maximum; including Rs.15,000 for parents (Rs.20,000 in case where parents come in senior citizen category), and Rs.15,000 for children, spouse and self.

Under the section 10 10(D), the maturity proceeds, death benefits etc. received from the life insurance policy are exempt from tax. With an exception for those policies issued after 01 April 2003, where the premium payable for any of the years during the term of the policy exceeds 20% of the sum assured.

Note: The key point to be remembered in all the cases is that the above exemptions can be availed only if the policy serves the minimum lock in period term i.e. 3 years which is now raised to 5 years. If an individual withdraws the policy beforehand, these provisions are no longer applicable.

With the introduction of the Direct Tax Code (DTC), to be implemented from the next financial year i.e. April 2011 onwards, only the approved pure life insurance products and annuity schemes would fall under the EEE tax status. As per the EEE tax regime the investments made into the life insurance policy, the earnings and the withdrawal all are exempt from tax.

As per the DTC, rest of the life insurance schemes apart from those stated above would fall in the EET (Exempt, Exempt, Tax) category i.e. the withdrawals under these schemes would no longer be tax free. DTC deals with calculating the income eligible for taxation.

Some of the introductions as per the DTC are -

The Section 56(2)(f) of the DTC, states that amount that is received from life insurance policy including any amount received as bonus on the policy will be taxed under 'gross residuary income'.

The Section 57(3) of the DTC deals with deductions applicable on 'gross residuary income. According to this section, bonus and any other amount received on the life insurance policy, except in case of key man Insurance, will be exempted from tax if the premium paid is up to a maximum of 5% of the sum assured. Also the receipt from life insurance should be only after the completion of the policy term or in case of death of insured.

DTC is framed with a view to improve the Indian Taxation System, making it at par with the international standards

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