Premiums that you pay for a life insurance policy is one such expense, but did you know that the life insurance cover needs to be at least 10 times the annual premium that you pay to be eligible for tax benefits?
Income tax rules
Under Section 80C, premiums that you pay towards a life insurance policy qualifies for a deduction up to ₹1.5 lakh, while Section 10(10D) makes income on maturity tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.
But if the sum assured is less than 10 times the premium—for instance you pay ₹1 lakh as premium for a sum assured of ₹5 lakh—you will get a deduction on the premium up to 10% of the sum assured. In the example, your deduction will be ₹50,000 and not ₹1 lakh (₹50,000 is 10% of ₹5 lakh).
Also, in case of death, the sum assured that's paid to the nominee continues to be tax-free. But, on maturity, since the policy doesn't meet the qualifying criterion for tax benefit, the income will be taxed at the marginal tax rate.
In fact, in order to ensure compliance, if the maturity proceeds exceed ₹1 lakh, then a tax deduction at source (TDS) will apply and the insurer will deduct 1% as TDS if the PAN of the policyholder is available.
Why does it matter?
If you are buying a term plan, then maybe you don't have to delve into the nitty-gritty because the sum assured in a term plan is several times the premium that you pay.
However, for insurance-cum-investment plans like unit-linked insurance plans or endowment and money-back insurance plans and single premium policies, looking at the insurance limit becomes important.
This is because, for policy holders below 45 years of age, insurance plans now offer a minimum sum assured of 10 times the annual premium, but those above 45 years may get a sum assured that is seven times the annual premium. Even in case of single-premium plans, the sum assured may be less than 10 times the premium.
But such policies will not qualify for tax benefits, so make sure you go through your insurance policy carefully.
SIPs are Best Investments as Stock Market s are move up and down. Volatile is your best friend in making Money and creating enormous Wealth, If you have patience and long term Investing orientation. Invest in Best SIP Mutual Funds and get good returns over a period of time. Know which are the Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds
For more information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300
OR
You can write to us at
Invest [at] SaveTaxGetRich [dot] Com
