Many people purchase life insurance plans not only to safeguard their loved ones financially in the event of death or permanent disability but also to claim the related income tax benefits. Section 80C of the Income Tax Act provides for various relief / claim avenues through which investors and those who have life insurance policies can claim. However, making these claims is not a matter of simple form filling exercise. One has to meet certain conditions and meet certain obligations. Here’s how you can maximize your tax benefits on your life insurance policy.
Which type of policy qualifies?
According to section 80C of the Income Tax Act, the only policy which provides cover to an individual and his/her immediate family (excluding parents) can be accounted for as being duly qualified for the requisite deductions when claiming tax. Other policies that may relate to other people such as parents, siblings or workers are considered not valid for this purpose.
It always helps to be conscious that if yours is a keyman insurance policy, then the proceeds from it are taxable.
What amounts qualify for claims?
The total amount that can be claimed for deduction from gross total income under section 80C currently stands at Rs 1.5 lakh. This includes life insurance premiums and investments in other avenues as specified in the act. It is also important to make sure that annual premium paid including any other sums such as service tax should not surpass the recommended limits of 10 percent, 15 percent or 20 percent of the actual sum assured.
The tax claim on the premium can be made as a deduction in the same financial year in which the premium was paid. Furthermore, in order to retain benefits accorded by section 80C, it is important that you don’t surrender or leave to lapse, or terminate, a policy that you may be dissatisfied with before the expiry of the minimum lock-in period.
To avoid a higher tax deduction at source (TDS) where TDS is applicable. TDS is deducted at a higher rate of 20 percent for accounts without PAN rather than 2 percent.
To maximize on the tax benefits claim of your life insurance, you ought to be prudent on your policy features, claim amount and timing.