Let's understand each of these two sections:
Tax Benefits of Term Insurance under Sec 80 C:
- Term insurance policy is a type of life insurance policy. Under sec 80 C (2) of the IT Act, any amount paid to an insurer for a life insurance policy, can be claimed as a deduction from gross total income of the policyholder. This entails that the premium amount paid to keep a life insurance policy active can be deducted from total income and then the actual, taxable income of policyholder can be arrived at.
Under Sec 80 C (2), to claim a term insurance tax exemption on annual gross income, the gross or total premium must have been paid in the same financial year. Every financial year (FY) begins on 1st April each year and ends on 31st March of the next year. Hence, to claim a term insurance benefit under 80C, for FY 2018-19, the premium amount must be paid between 1.04.18 and 31.03.2019 (including both dates).
In case your premium date falls on 27.03.19 but you forget to pay on time and instead pay the premium on 5.04.2019, which is within the grace period of 15 days offered by the insurer. While your premium may be accepted by the insurer and your policy will be live, you cannot claim deduction for FY 2018-19, as the date of your actual payment took place after the end of FY 2018-19. However, you can claim this premium deduction in FY 2019-20, which is the actual financial year in which premium has been paid.
Only an Individual or a Hindu Undivided Family (HUF) can enjoy term insurance tax exemption. The insured persons can only include self, spouse and children. There is no ceiling on the number of children and it is irrespective whether the children are major, minor, married, unmarried or adopted.
In case of an HUF, a term insurance policy can be taken in the name of any of the family members. However, a policy under the name of any other persons besides the ones specified (i.e. self, spouse, children, HUF member) cannot avail term insurance tax exemptions.
Under sec 80C (3) of the IT Act, it is clarified that in case of an insurance policy issued on or before 31.03.12, the tax deduction for premium paid can only be claimed upto 20% of the actual sum assured. if the total premium paid in any year exceeds 20% of the actual sum assured, the deduction on gross income is still only available only up to 20% of the sum assured and the excess amount cannot be claimed as deduction.
According to Sec 80C (3A), actual sum assured is the least sum assured across all policy years. This actual sum assured does not include any bonus amount to be received over and above the sum assured and the premium which is to be returned to the policyholder is also not included in the actual sum assured. For policies issued on or after 1.04.2012, this limit has been changed to only 10% of assured sum instead.
In case the insured person suffers from disability as mentioned in Sec 80U(autism, mental retardation etc.) or those diseases as specified in Sec80DDB, read with Rule 11DD of Income Tax Rules (blindness, deafness etc.), and has a policy issued on or after 1.04.2013, the limit is raised to 15% of actual sum assured. Hence, for a disabled child/person, the total premium in a year must not exceed 15% of the actual sum assured as only 15% of tax exemption on total income will be calculated and the excess premium paid is not eligible for tax exemption.
- A term insurance policy purchased from any insurer, public (LIC) or private (Bharti AXA, Bajaj Allianz, Aditya Birla etc. ) is eligible for tax exemption under 80C, as long as the insurer is approved by the IRDAI. Thus, a term insurance plan bought from either a public/government or private company , approved by IRDAI is eligible for the same tax exemption under 80C.
- The maximum amount that can be claimed as deduction under 80C is ₹ 1.5 Lakh which includes premium paid for term life insurance and other tax saving schemes. Thus, on all your investments, a maximum deduction limited to ₹ 1.5 Lakh in one or more of the investment options (Life Insurance, PPF, ELSS etc.) can be availed. If your investments are more than ₹ 1.5 Lakh, the maximum available tax benefit is only ₹ 1.5 Lakh.
In case your investments fall under sec 80CCC or 80CCD, these investments too will be considered under 80C for calculating ₹ 1.5 Lakh limit on the tax.
Provisions of the Income Tax Act:
|Section||Essentials||Exemption Limit (₹)|
|80C||Investments in PPF, PF, Insurance, NPS, ELSS etc.||1,50,000|
|80CCD||NPS investments (up to ₹50,000).||50,000|
|80D||Investment in medical insurance for self or parents.||25,000/50,000|
|80E||Interest on education loan.||Full Amount|
|24||Interest paid on Home Loan.||200,000|
|10(13A)||House Rent Allowance (HRA).||As per salary structure|
The premium of a term insurance plan has to be paid regularly for a minimum number of years to retain eligibility for tax deduction under 80C. A term insurance plan must be active for a minimum period of 2 years. If the term plan is terminated (voluntarily surrendered by policyholder or cancelled by insurer) before expiry of 2 years, no tax benefits will be available to the person.
As clarified in Sec 80C (5), if the policyholder cancels or surrenders the policy voluntarily or if the policy lapses due to non-payment of premiums or non-renewal of policy and the insurer cancels the plan, then the tax exemption under 80C is not available to the person.
Hence, the premiums paid for the financial year in which policy is cancelled are no longer eligible for deduction and the claims received for previous years of policy will be considered as part of gross income for the financial year when policy was cancelled and the person will be taxed accordingly.