LIFE insurance should form an integral part of an individual's financial planning. It should be seen as a security that one can provide to his family to meet future uncertainty. The type of the insurance policy and the amount of the financial cover which an individual may choose is a matter of his personal choice and depends upon the number of factors including his age, future financial commitment, income level, etc.
Apart from the financial cover to meet future uncertainties, life insurance can also be looked at as one of the important tax-saving instruments on account of income-tax benefits available under the Income Tax Act, 1961 (The Act).
INCOME-TAX BENEFITS
The income-tax benefits in respect of the life insurance can be broadly classified under two categories. First, the benefit available in respect of payment of the life insurance premium and second, in respect of the amount received under a life insurance policy on maturity or on happening of certain contingency.
DEDUCTION IN RESPECT OF PREMIUM
A deduction under section 80C of the Act can be claimed in respect of the life insurance premium paid by the tax payer during a financial year (1 April to 31 March). The maximum deduction that could be claimed is restricted to the overall limit of Rs 1 lakh available under the said section. It should be noted that the deduction is available only to an individual or to the Hindu Undivided Family. In case of an individual, the deduction can be claimed in respect of premium paid for life insurance for self, spouse and any child of such individual. In case of Hindu Undivided Family, the deduction can be claimed in respect of premium payable on behalf of any member of the family.
AMOUNT RECEIVED ON MATURITY OR ON DEATH — NOT TAXABLE
As per the section 10(10D) of the Act, any amount received under a life insurance policy, including bonus paid on such policy is exempt from income-tax, subject to specified conditions. However, the sum received under a key man insurance policy is taxable.
Similarly, any claim proceeds received from the insurance company by the dependent(s)/nominee(s) of the policy holder after his death is not taxable under the Income-Tax Act.
CAUTION POINT
It is pertinent to note that any sum received under an insurance policy issued on or after 1 April, 2003, in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the capital sum assured, is taxable. However, any sum received under such a policy on the death of the policy holder continues to be exempt from tax.
TO SUM IT UP
As per media reports, it is quite ironical that on an average, people spend more money on their vehicle insurance rather than personal insurance. Probably, the reason is that vehicle insurance is mandatory while life insurance is not.
In case of individuals where they are the sole/main earning members of the family, life insurance should be the first and foremost financial investment that one should consider. In this context, term insurance policies, wherein for a reasonable premium a large amount of life insurance cover could be taken, do provide a good avenue to financially de-risk the family in the hour of need. Further, the tax benefits that one could avail should also act as the catalyst to encourage people to go for life insurance.
