- For policies issued after April 2014, Section 80C deduction limit is 10%
- For policies issued before April 2014, it is 20%
- For policies cancelled before 2 years, tax benefits are reversed
1) There is a perception that the entire life insurance premium paid is tax deductible under Section 80C. But this is not correct. If the insurance policy was issued on or before April 2012, the deduction is limited to 20 per cent of the sum assured. For policies issued after April 2012, the deduction amount is limited to 10 per cent of the sum assured. Suppose, a person bought an insurance policy with premium of Rs 8,400 with a sum assured of Rs 25,000 on March 2013. The deduction will be limited to Rs 2,500 (10 per cent of Rs 25,000) only. No deduction can be claimed against the remaining amount. Currently, insurance companies offer policies in which the premium is less than 10 per cent of the sum assured.
2) In case insurance policy is surrendered before minimum holding period, the tax benefits availed during the policy term gets reversed. For Ulips (unit-linked insurance plans), the period is five years and for other life insurance products it is two years. For example, if the Ulip is surrendered before five years, the income tax breaks claimed get reversed. The deduction amount claimed is added to the income of the individual and taxed as per the slab in the year in which it is surrendered.
3) A person can claim deduction under Section 80C against the premium paid for self, spouse and kids. No deduction can be claimed for the insurance premium paid for parents, in-laws and siblings.
4) Most people are not aware that insurance proceeds (other than in case of death of the insured) are fully taxable in case the insurance premium paid is more than 10 per cent of the sum assured. The government has made it mandatory for insurance companies to deduct a TDS (tax deducted at source) at the rate of 2 per cent from the insurance proceeds if the insurance policy doesn't meet the criteria. However, no TDS will be deducted if the maturity proceeds are less Rs 1 lakh.