When it comes to investment for tax saving, perhaps life insurance is one of the first things that comes to our mind. Honestly speaking, saving tax or not, everyone should have a life insurance policy to cover the two vital risks – ‘dying too young and living too long'
Coming back to tax savings, the premium paid on a life insurance policy qualifies for tax deduction under Section 80C of the Income Tax Act 1961. The maximum amount that can be claimed is ₹ 1.5 lakhs.
However, the tax benefits of a life insurance policy don’t stop here. The maturity benefits obtained from a policy are also tax-free as per section 10 (10D) of the same act. In a case where the insured person passes away and the benefit is received by the nominee, the maturity benefits become tax-free in the hands of the nominee.
However, the maturity becomes tax-free only when the premium does not exceed 10% of the actual sum assured. What is ‘actual sum assured’? It basically means the lowest sum assured in all the policy years and does not include any bonus amount to be paid to the policyholder. It also does not contain any premiums which are to be returned to the policyholder. For policies issued between 1.4.2003 and 31.3.2012, this amount is 20% instead of 10%.
Moreover, if the maturity benefit is not tax-free under section 10(10D), it will attract a TDS of 2% as well.
The world of life insurance is vast. If you want to learn the intricacies and nuances of life insurance policies, we recommend you to read our detailed module on Life Insurance.