Income Tax

A Brief Analysis of Life Insurance Policy (Deduction u/s 80C)

What is Life Insurance Policy (LIP)?

Life Insurance Policy (LIP) is a contract between a Policyholder and an insurance company. Insured (Policyholder) makes a regular payment to the insurance company. That regular payment is called premium. In exchange of premium, the insurance company provides a lump-sum payment to the beneficiaries on insured’s death.

The policy is to be taken in whose name?

The policy is taken in two ways

  1. Individual (Taxpayer himself, Spouse or Child)
  2. HUF (Any member of HUF)

What is the amount of deduction?

The maximum limit of deduction u/s 80C (including 80CCC & 80CCD) is 1,50,000.

What are the amounts not to be considered in actual sum assured?

For this purpose, the value of any premiums agreed to be returned or the value of any benefit by way of bonus or otherwise, over and above the sum actually assured, shall not be taken into consideration.

What is the meaning of the actual sum assured?

In case of the life insurance policies to be issued on or after 1st April 2012, the actual capital sum assured shall mean the minimum amount assured under the insurance policy on happening of the insured event at any time during the term of the policy, not taking into consideration –

  • the value of the insurance premium agreed to be returned; or
  • any benefit by way of bonus or otherwise over and above the sum actually assured which is to be or may be received under the policy by any

 

If the insurance policy has varied sum assured during the term of the policy then the minimum of the sum assured during the lifetime of the policy shall be taken into consideration for computation of the “actual capital sum assured”, in respect of life insurance policies to be issued on or after 1st April 2012.

Is any sum received on the death of a person exempt or not?

Any sum received under a LIP including the sum allocated by way of bonus on the death of a person is exempt.

Note: Any sum received under section 80DD(3) shall not be exempt under section 10(10D). Accordingly, if the dependent disabled, in respect of whom an individual has paid or deposited any amount in any scheme of LIC or any other insurer, predeceases the individual, the amount so paid or deposited shall be deemed to be the income of the individual of the previous year in which such amount is received. Such an amount would not be exempt under 10(10D).

It may be also noted that exemption is not available in respect of the sum received under Keyman Insurance Policy.

What is Keyman Insurance Policy?

“Keyman insurance policy” is a life insurance policy taken by a person (first person) on the life of another person (Second Person) who is or was the employee of the first person or is or was connected in any manner whatsoever with the business of the first person.

The term includes within its scope a keyman insurance policy which has been assigned to any person during its term, with or without consideration. Therefore, such policies shall continue to be treated as a keyman insurance policy even after the same is assigned to the keyman.

Consequently, the sum received by the keyman on such policies, being “keyman insurance policies”, would not be exempt under section 10(10D).

 

What is the Exemption available under section 10(10D) and deduction allowable under section 80C?

Refer the below-given table for the calculation of the amount to be exempt.

Untitled11 TaxClue

Example:

  Date of issue of policy Person insured The actual capital sum assured The insurance premium paid during 2018-19 Deduction u/s 80C for A.Y.2019-20 Remark (restricted to % of sum assured)
(i) 1/4/2011 Self 4,00,000 40,000 40,000 20%
(ii) 1/5/2014 Spouse 1,80,000 20,000 18,000 10%
(iii) 1/6/2016 Handicapped son (section 80U disability) 5,00,000 80,000 60,000 15%
Total 118,000  

Resource: Direct taxation, ICAI 2019


 

 

 

TaxClue Team

Taxclue is an online news portal for reporting all news, articles, judgments, Circulars, orders, and notifications relating to various corporate and tax laws in India. We use the tagline ‘Simplifying Laws’. Our mission is to Simplify the Laws and make people aware of their rights and duties in relation to tax matters in order to equip them to participate in nation-building. TaxClue is a team of young professionals. We started in December 2016 with the mission of knowledge sharing. TaxClue would like to hear your valuable suggestion. Please write to our editorial team at [email protected]

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