Income Tax - Life Insurance

Contrary to the general belief, not all insurance policies provide tax benefits. The most important provisions are listed below:

Deduction on annual premium paid on total income (U/s 80C)
The maximum limit for the deduction in the FY 2014-15 is Rs.1.5 Lakhs. But the deductions are:
 • limited to 20% of sum assured for policy issued between 01-04-2003 & 31-03-2012
 • limited to 10% of sum assured for policy issued after 31-03-2012

Surrender/maturity value of life insurance policy is tax exempt (U/s 10 (10D))
This is exempt (not for death claim) only if:
 • annual premium is <= 20% of sum assured for policy issued between 01-04-2003 & 31-03-2012
 • annual premium is <= 10% of sum assured for policy issued after 31-03-2012

If proceeds from life insurance is not tax exempt
Only the net proceeds less total premiums paid is considered as taxable income. ITD clarifies this in Circular No.7/2003 Clause 10.3. ❝The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable.❞  Read this.

Reversal of 80C benefits on termination of policy (U/s 80C (5))
If the policy terminates due to non-payment of premium or by notice, deductions claimed in all previous years shall be reversed and shall be taxable in the current year.
 • for single premium policies - if terminated within 2 years of date of issue.
 • for other policies - if terminated before premiums have been paid for 2 years.
 • for ULIPs - if terminated within 5 years.

Pension plans
These are taxed in a totally different way.
 • contribution to the plan is allowed as deduction from in each year (U/s 80CCC)
 • pension received is taxable (U/s 80CCC (2)(b))
 • surrender value is taxable (U/s 80CCC (2)(a))
 • commutation value received on maturity is tax exempt (U/s 10 (10A)(iii))