Tax on Insurance Products

Consider financial and tax implications before deciding to get out of a bad insurance product midway

Insurance agents never forget to mention to their prospective clients about the tax benefits of buying an insurance product. They would go on about the tax deduction available on premiums paid and tax-free returns on insurance products. However, they never mention about the financial and tax implications when someone wants to get out of an insurance policy midway. The issue has become very crucial lately because of the rampant mis-selling of Unit Linked Insurance Plans (ULIPs) and Unit Linked Pension Plans (ULPPs). We get mails from several readers everyday, asking for advice on how to get out of bad insurance products they had bought in the past on wrong advice. While most readers are aware of the surrender charges applicable on early exit from insurance products, they are clueless about the taxation aspect. That is why we have decided to put together a comprehensive tax reckoner on insurance products. We hope this tax reckoner would help policyholders to reach a final decision on continuing/discontinuing the policy, knowing fully well the financial and tax implications on the decision. The reckoner would also be useful while filing Income Tax returns.

We recommend only term plans to buy life insurance cover. We are strictly against buying insurance products that have both insurance and investment elements in them. These products typically offer very little insurance cover. They are also not ideal for investments. That is why we don't encourage mixing insurance and investment needs. Keep it simple. Buy a term plan for life insurance cover. Invest in mutual funds to achieve your financial goals.
Life Insurance Tax Reckoner 2015-16
Taxation Benefit (Deduction)
Unit Linked Insurance Plan (ULIP) / Traditional Plans: Premiums qualify for deduction of up to R1.5 lakh under Section 80C. However, the aggregate amount claimed under section 80C, 80CCC & 80CCD(1) should not exceed R1.5 lakh.
Unit Linked Pension Plan (ULPP): Premiums qualify for deduction of up to R1.5 lakh under Section 80C. However, the aggregate amount claimed under section u/s 80C, 80CCC & 80CCD(1) should not exceed R1.5 lakh.
Surrender
Unit Linked Insurance Plan (ULIP) / Traditional Plans: Tax deducted at source (TDS) under section 194DA of IT Act (effective from 1st October 2014) if total amount exceeds R1 lakh @
- 2% if valid PAN card is present
- 20% if valid PAN card is not present
No TDS in case of:
- policies issued up to 31.03.2003
- policies issued between 01.04.2003 to 31.03.2012 if sum assured is more than five times the annual premium
- policies issued from 01.04.2012 and onwards if sum assured is more than 10 times the annual premium
Deductions claimed earlier will be added back to income and taxed as income if surrender is made:
- within two policy years for single premium policies
- before premiums have been paid for two policy years for regular premium policies
- within five policy years for ULIP of UTI or LIC
If surrendered within lock-in period, surrender value will be paid after completion of lock-in year and after deduction of applicable surrender charges.
Unit Linked Pension Plan (ULPP): Surrender value will be taxable in the year of receipt.
Maturity
Unit Linked Insurance Plan (ULIP) / Traditional Plans
Tax deducted at source (TDS) under section 194DA of IT Act (effective from 1st October 2014) if total amount exceeds 1 lakh rupees @
- 2% if valid PAN card is present
- 20% if valid PAN card is not present
No TDS for:
- policies issued up to 31.03.2003
- policies issued between 01.04.2003 to 31.03.2012 if sum assured is more than five times the annual premium
- policies issued from 01.04.2012 and onwards if sum assured is more than 10 times the annual premium
Unit Linked Pension Plan (ULPP)
Policyholder can take out 1/3rd of the corpus tax-free under section 10(10D) of IT Act and rest should be used to buy annuity. Annuity will be treated as income and taxed as per applicable tax slab rate.
Death
Unit Linked Insurance Plan (ULIP) / Traditional Plans: Tax-free under Section 10(10D)
Unit Linked Pension Plan (ULPP): Tax-free under Section 10(10D)

Service Tax Rates
Term Insurance Premium 14%
ULIP charges* 14%
Health insurance premium 14%
Rider premium 14%
Endowment premium 3.5% for first year premium & 1.75% for renewal premium
*Fund management charges, Mortality charges, Premium allocation charges, Policy administration fees, Switch fees, Reinstatement fees, any other charge as per the policy document

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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