The reply will shock you.
One of the in style income-tax deduction advantages that almost all taxpayers use to the hilt and maximise every year is Part 80 C. Among the many basket of devices that supply part 80 C tax deduction advantages is insurance coverage premium.
However there may be one other vital part, Part 10(10D) of the Revenue-tax Act, which decides whether or not the maturity proceeds of your life insurance coverage coverage can be tax-free or not.
Sure, you learn that proper. The maturity payout of your life insurance coverage insurance policies might not at all times be tax-free as many individuals imagine.
Additionally learn: A yr after Funds 2021, I-T division clarifies taxation guidelines of ULIP beneficial properties
How does Part 10(10)D decide taxation at maturity?
To make issues easy, we’re solely speaking right here about conventional insurance coverage schemes like endowment and money-back plans and in addition about ULIPs or unit-linked insurance policy. These are the one insurance-cum-investment plans that pay survival advantages on maturity. Put merely, we’re solely speaking of these insurance policy the place you get your a reimbursement on the finish of the coverage’s tenure.
A pure time period life insurance coverage coverage doesn’t have any maturity or survival advantages and, therefore, isn’t affected by the rule we’re going to talk about.
Additionally, there’s a distinction between dying advantages (paid out within the case of the dying of the policyholder in the course of the coverage’s tenure) and maturity advantages (paid out on survival and completion of the coverage time period). And right here, we’re solely speaking concerning the taxation of maturity advantages. Dying advantages are at all times tax-free.
That mentioned, here’s what Part 10(10)D is all about.
If you are going to buy a life insurance coverage coverage and the annual premium paid is greater than 10 % of the sum assured of the coverage, the maturity proceeds (survival advantages) can be taxed.
This 10 % rule is for insurance policies bought after April 2012. For these purchased earlier, the rule threshold is 20 % of the sum assured.
Let’s say you buy an endowment plan with a sum assured of Rs 15 lakh. The annual premium you pay for that is Rs 1.8 lakh. Now as per the ten % rule to make maturity tax-free, the annual premium needs to be decrease or equal to 10 % of Rs 15 lakh, i.e., Rs 1.5 lakh.
However on this case, it’s Rs 1.8 lakh and greater than the rule threshold. For the reason that 10 % rule isn’t met on this case, the maturity payout from our coverage can be taxable as per the tax charges that prevail within the yr of maturity.
Typically, the maturity quantity is made up of i) sum assured and ii) accrued bonuses through the years. So, this full maturity payout can be taxable if the annual premium is greater than 10 % of the sum assured.
Some individuals have doubts about whether or not it’s 10 % of the sum assured or the maturity quantity. The rule could be very clear about it being 10 % of the sum assured solely. However there’s a twist: it’s a must to pay taxes on all the maturity quantity if the ten % rule is breached.
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ULIP Rs 2.5 lakh taxation rule vs part 10(10D)
Final yr, the federal government tried to rationalise the taxation of high-value ULIPs which had been used incessantly by HNIs or excessive net-worth people to keep away from taxes.
Part 10(10D) permitting tax exemption of the maturity quantity continues to be relevant to ULIPs so long as the annual premium is under 10 % of the sum assured.
However Funds 2021 withdrew the tax-free standing if the premium quantity within the yr exceeds Rs 2.5 lakh. For such insurance policies, the beneficial properties on maturity shall be handled as capital beneficial properties and taxed below Part 112A. That’s, the maturity proceeds of the ULIP can be taxed like mutual funds. Any capital beneficial properties made on such high-premium ULIPs will appeal to short-term capital beneficial properties (STCG) or long-term capital beneficial properties (LTCG) tax at redemption or maturity at par with different equity-oriented investments.
Hold funding and insurance coverage separate
All this dialogue about maturity payout taxation from life insurance coverage mustn’t make us push the concept of holding investments and insurance coverage separate to the backburner.
Time period plans are the most suitable choice for all times insurance coverage. You don’t want any endowment or money-back plans or ULIPs for all times insurance coverage. You’ll be able to as an alternative spend money on pure funding and financial savings merchandise like the general public provident fund, fairness funds, and many others.
Most individuals focus solely on the tax-saving half (below part 80C) of their insurance coverage premiums. However as we mentioned on this article, it’s all of the extra vital to make sure that you don’t buy an insurance coverage coverage the place it is advisable to pay premiums that exceed 10 % of the sum assured to keep away from having your maturity quantities taxed.