While insurance is primarily an expense that covers our emergency needs, it can also be used to reduce the amount on your taxable income. Here are the government mandated deductions allowed under the Income Tax Act, 1961.
IT Exemptions on Life Insurance Premiums:
Under Sec.80C of Income Tax Act, 1961 deduction is available for the premium paid on life insurance policies with a maximum annual ceiling of Rs. 1,00,000/annum, irrespective of the Gross total income, if the Sum Insured is 10 times of annual premium paid during the year. The details are as under: Life Insurance premiums paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in the case of HUF, premium paid on the life of any member thereof, under an insurance policy, (other than a contract for a deferred annuity) issued on or after the 1st April 2012 shall be eligible for deduction only to the extent of 10% of the actual capital sum assured.
Are the Maturity Amounts Taxable:
Under section 10(10D) of Income Tax Act, 1961 maturity benefits or death benefits including the sum allocated by way of bonus on such policy/policies are tax free in the hands of policyholders if, at any point of time during the policy term, premiums paid in any year do not exceed 20% of the basic Sum Assured. For policies issued on or after 1st April, 2012, premium should not exceed 10% of Sum Assured.
Is exemption in respect of commutation of pension under Pension Plans available Under Section 10(10A) (iii) of the Income-tax Act?
Any payment received by way of commutations of pension out of Annuity plans is exempt from tax.
Tax Benefits available on pension plans:
Under section 80CCC, you can avail benefit of up to Rs. 1 lakh on the premium paid towards a pension plan within the overall limit under Sec.80C. On maturity, one-third of the maturity amount withdrawn is tax-free. Monthly pension receipts will be treated as income in the hands of the assessee and will be taxed accordingly.
What happens if I stop paying my premiums in subsequent years:
If you stop premium payments of your policy, it amounts to discontinuation of the policy and disqualifies for Income Tax benefits.
If I purchase a Unit Linked Insurance Plan (ULIP) and I choose to discontinue my policy, can I claim any tax benefits?
If you chose to discontinue a ULIP before paying for 5 years from commencement of policy, you are not entitled to any tax benefits in the previous years. The quantum of deduction already taken in the preceding years would be deemed as your income in the year in which policy is terminated.
Income Tax Benefits on Health Insurance Premiums:
Under Sec.80D of Income Tax Act, 1961, deduction is allowed up to Rs.15,000/- per annum, if the amount is paid to buy or to keep in force health insurance policy for assessee or his family (i.e. Spouse & dependent children) or any contribution made to the central Government Health Scheme during the year.
In addition to this, an additional deduction up to Rs. 15,000/- per annum, if the amount is paid to buy or keep in force a Health Insurance Policy for parents of the assessee, whether dependent or not.
If the sum specified above is paid to buy or to keep in force a Health Insurance Policy on the health of any person specified above, who is a senior citizen, then the deduction available will be up to Rs. 20,000/-. Here senior citizen means a person who is of sixty years of age or more during the previous year.
What kind of health insurance policies are eligible for Income Tax Rebates:
The health insurance policies as mentioned above shall be in accordance with the scheme framed by: a) The General Insurance Corporation of India as approved by the Government of India in this behalf or; b) From any other insurer approved by the Insurance Regulatory and Development Authority.
Other Life Insurance premiums:
Under Sec.80DD, deduction from total income up to Rs.50000/- per annum is allowed on the premiums paid for maintenance of an Insurance Policy on the life of a handicapped dependent and an amount of Rs. 1,00,000/- per annum where handicapped dependent is suffering from severe disability. This limit is over and above the limit of Rs. 1,00,000/- available under Sec.80C/80CCC.