Tax benefit on Payment and Maturity of Life Insurance Premium

People are using Life insurance policies as tax planning tool as premium paid on Insurance Policies are eligible for tax benefits under Section 80C of the Income Tax Act 1961 (Act) and Maturity Proceeds are also eligible for exemption under section Section 10(10D)  and  Section 10(10A)(iii). 
Life Insurance helps Assessee in saving tax, achieving their long term goals and it also provides Comprehensive financial protection against unforeseen events of their family.

Deduction U/s. 80C in respect of life insurance premium

Maximum Limit – Maximum Deduction allowed under this Section is Rs. 1.50 Lakh and the sum includes payment on other allowable investment option available Under Section 80C of the Income Tax Act,1961. It is to be further noted that combined Maximum limit of deduction under Sec 80C & 80CCC & 80CCD (1) is Rs 1,50,000.

Restriction on Deduction limit: Deduction will be allowed only for premiums upto a maximum of 10% of the sum assured for policy issued on or after April 1, 2012. In case of policy issued before March 31, 2012, deduction will be allowed only for premiums upto a maximum of 20% of the sum assured.

Allowable on Payment- Only life insurance premium paid or deposited during the year are allowable as deduction under Section 80C. 

Disallowance: 

The deductions claimed earlier will be taxable as income if the policy is terminated either by notice or by failure to pay any premium in case of,

Single Premium Policy : within 2 years after the commencement date
Regular Premium Policy : before premiums have been paid for 2 years.

Individual and Hindu undivided family (HUF) can take tax deduction's benefit u/s 80C. It can be paid :-

(i) in the case of an individual (Resident or Non Resident)
- On his own life
- On Wife/Husband (Dependent or Not)
- Child
- Major or Minor (Dependent or Not
- Married or Unmarried Daughter / Son (Dependent or Not)

(ii) in the case of a Hindu undivided family (HUF), any member thereof;

Please note that life insurance premium paid by you for your parents (father / mother / both) Brother, Sisters or your in-laws is not eligible for deduction under section 80C.

If you are paying premium for more than one insurance policy, all the premiums can be included.

It is not necessary to have the insurance policy from Life Insurance Corporation (LIC) – even insurance bought from private players can be considered here.

Tax-ability on Maturity

Section 10(10D)

The proceeds under a life insurance policy are exempt under Section 10(10D) of the Act, subject to the provisions of the said section.

Section 10(10A)(iii)

Commuted Pension received from Pension fund (Pension Plans approved by IRDA) would be tax-free.

Goods And Service Tax (Earlier Service Tax) on Life Insurance Premium

All premiums and charges are subject to applicable taxes (i.e. GST) as applicable under the prevailing tax laws.

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Effect of GST on Insurance Premium

With  a hike in GST rates to 18% from the current 15%, the insurance sector are poised to get more expensive after July 1, 2017. The immediate effect will be the increase in premiums especially for families that own Life Insurance, Health Insurance and Car Insurance.

The existing and new insurance buyers would have to bear the updated prices. The Policy holders stand a chance to be benefited if the insurance providers get a green signal on the input tax credit benefit. Unfortunately, as of yet, it is still unclear since he Center/State GST  structure is very complex. It might create confusions and conformity for the insurance buyers and increase the administrative expenses for the insurance providers. If the insurance buyers remain confused about the GST updates, then irrespective of the increase or decrease in the prices the financial strength will adversely affected. The general insurance sector will be equally impacted. The overall outgo for health, car, and various non-life plans would be increased by 3 percent.

The Insurance policies premium represents two components - Savings and Risk Coverage. The service tax is levied specified only on the premium component. 

What GST (Goods And Service Tax) Rules says, the value of service on which the GST is levied regarding the life insurance sector shall be accordingly;

(i) The gross premium would be reduced by the amount allocated for or savings or investment on policyholders behalf.

(ii) When it comes to the single premium annual policies, ten percent of the single premium would be charged from the policy holder.

(iii) In other cases, 25 percent of the premium for the first year and 12.5% of the premium in the upcoming years will be charged.

(iv) In case the total premium paid by the policy holder is towards the life insurance's risk cover, oly the 18% GST would be levied on the total premium.

There are three types of life insurance;

* Term Insurance Plans - Basic life insurance policy

** ULIP Plans - Insurance and investment under a single integrated plan

*** Endowments Plans (including money back plan) - Life insurance policies that pay a lump sum on maturity/death or a fixed sum every month (like pension)

List of new revised rates on all insurance plans are as follows :

GST RATES : NEW RATES UNDER GST FOR INSURANCE POLICIES
INSURANCE PRODUCTS	BEFORE GST	AFTER GST	APPLICABILITY
Endowment Plans – 1st Year	3.75%	4.50%	On 25% of Premium
Endowment Plans – Renewal Premium	1.88%	2.25%	On 12.5% of Premium
Health Insurance Premium	15%	18%	On Entire Premium
Rider Premium	15%	18%	On Entire Premium
Annuity: Single Premium	1.50%	1.80%	On 10% of Premium
Term Insurance Premium	15%	18%	On Entire Premium
ULIP (On Charges)	15%	18%	On Premium minus Investment Amount
Vehicle Insurance	15%	18%	On Entire Premium
Travel Insurance	15%	18%	On Entire Premium

Life and health insurers will not have input tax credit as it is not available for life and health insurances ( as they are for personal purposes). Even corporate policyholders with group life and health insurance for their employees will not enjoy any input tax credit.

Life insurance provided under Government Schemes are exempted from GST;

1) Janashree Bima Yojna (JBY)

2) Aam Aadmi Bima Yojna (AABY)

3) Life Micro-Insurance product (as approved by the IRDA having maximum amount of cover of fifty thousand rupees)

4) Varishtha Pension Bima Yojna (VPBY)

5) Pradhan Mantri Jeevan Jyoti Bima Yojna (PMJJBY)

6) Pradhan Mantri Jan Dhan Yojna

7) Pradhan Mantri Vaya Vandan Yojna 

8) Any other insurance schemes of the State Government as may be notified by Government of India on the the recommendation of GST Centre.

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