Life Insurance: Know the rules for tax exemption before buying a policy

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When buying an insurance policy, the customer has to come to an agreement with the insurance company. There are various aspects that are laid down in the agreement. The policyholder has to pay a premium to the insurance company. The insurance company pays compensation to the policy nominee in the absence of the policyholder. There is also a tax aspect attached to the life insurance policy.

You can get tax exemption under section 80C of the Income Tax Act, 1961 on the premium you pay for a life insurance policy in the entire financial year. The policyholder can get tax exemption on investment up to a maximum of Rs 1.5 lakh.

Maturity amount

The maturity amount that is received after the maturity of a life insurance policy consists of two parts- the sum assured and other bonus accrued during the policy term. On maturity of the policy, the insured gets the sum assured by adding the bonus amount as well.

Tax-free sum assured

Under Section 10(10D) of the Income Tax Act, the sum assured on maturity or death of the insured is completely tax-free. Tax exemption is also available on the bonus amount. However, there are certain conditions that need to be fulfilled in order to avail the tax benefit.

Rules

There are certain rules on life insurance policies issued between April 1, 2003 and March 31, 2012.If the premium payable in any year exceeds 20% of the actual sum assured, then the amount received from the policy will be taxable to the insured. It is determined at nominal tax rates.

The policy which is purchased after April 1, 2012, will get full tax exemption on the maturity amount only if its premium is less than 10% of the sum assured. If you are paying an annual premium of Rs 1 lakh, then the minimum sum assured should be Rs 10 lakh for tax exemption.

On the death of the insured, the amount received by the nominee is tax-free.

However, in the case of the Keyman insurance policy, the amount received on the death of the insured is not tax-free. In this type of insurance policy, the company is the proposer. A proposer is a person or entity who applies for the insurance cover. In this case, the premium is paid by the company itself. Under the policy, the life of the most important employee of the company is insured. In this case, the claim amount goes to the company.