All of us buy Life Insurance in various forms like Traditional plans, ULIPs, Pension plans. A prominent reason for buying Insurance in India remains the Tax savings definitely along with risk cover. Most of us generally do not have time to go in details of Insurance policies and rely on the small discussion with agent. We get to know about basic scheme plan and payment terms on maturity or claim and then give a cheque immediately. However there are other finer details on tax aspects also like its eligibility for tax deduction is only when the premium is less of equal to 10% of the sum assured. Let us see few of such small details related to tax aspects in different scenario with different Insurance schemes.
Death of the insured in case of ULIPs, Pension and Traditional plans
In an unfortunate event of death of Insured, the proceeds or the amount received towards the claim from the policy by the family members is totally exempt from tax under section 10 of Income tax Act. However, the family members are required to provide the death certificate and other related documents to the Insurance company.
Surrender of policy before maturity in case of ULIPs and Traditional plans
The tax implication on the amount received in case of surrender of policy depends on the number of premium paid. It is tax exempt only in the case where 5 premiums were paid in the policy. In case, the number of premium paid on the policy is less than 5, the amount of proceeds or the surrender value will straight way added to the gross taxable income. The individual slabs will define the actual tax liability on this surrender value.
Surrender of policy before maturity in case of Pension plans
Let me tell you, it is not a good idea as it bear has two way tax implications. As the one side of sword, it will cut your tax benefit which you claimed towards deduction under section 80C and as such that needs to be reversed. For the second side, it will cut your surrender value as the entire surrender value will get added in your current year income. As such you have to pay taxes on the entire amount as per individual tax slabs in the current year. Now the Insurance regulator mandates that the two-third of this surrender value needs to be utilized to purchase annuity plan.
Maturity of ULIPs and Traditional plans
On completion of policy tenure, the amount received towards maturity value is totally tax free.
Maturity of Pension plans
The proceeds of maturity value in case of pension plans are tax free up to 1/3rd of the amount. The remaining two-third of the maturity value should be used to purchase annuity plans as per latest rules of Insurance regulator, IRDA.
As we have seen that in different scenario, different policies are taxed in varying fashion. So a simple analysis of various scenario while buying policy will help us in getting into a appropriate choice.
