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 Finer points about income tax benefits related to life insurancea

Finer points about income tax benefits related to life insurancea
October, 12th 2016

Finer points about income tax benefits related to life insurance
Arnav Pandya

Investors have a lot of questions with regard to the various provisions of the Income Tax Act. This is understandable because what looks to be simple and clear from a distance suddenly looks confusing when one is faced with some actual situation wherein the finer points in the law make all the difference. This is no different when it comes to the provision of tax free receipts from insurance policies and there are a lot of areas where concerns have been raised about the exact impact that the different provisions would have. Here is a detailed look at some of the common questions that are faced by investors in this regard.

Insurance company does not matter

The conditions for the tax free benefit from the proceeds of insurance policies mentions details about the extent of the premium to be paid as compared to the sum assured. This does not mention the kind of insurance company that will qualify for the benefit. Some investors often ask whether the benefit of the tax free nature of the receipts are restricted to just the state owned life insurance company or the benefit is available for private companies too. There is not much to worry about on this front because the receipts from all kinds of insurance companies would be eligible for the benefit and that there are no restrictions on this front. This is important because there should not be any confusion or doubt in the minds of investors about the eligibility of the benefits for them.

Exactly the specified percentage

The condition for the tax free nature of the benefits says that if the policies are issued on or after April 1, 2012 then the premium payable in any year should not exceed 10 per cent of the sum assured. The main question that a lot of people have is what happens when the premium is exactly 10 per cent of the sum assured. Would this violate the situation and lead to taxable income arising for the individual or would the tax free nature continue. The point to consider here is the exact wording in the section which has the word exceeds so this means that the premium has to go above the 10 per cent limit. As long as this is not violated the benefits will continue which means that the premium at exactly the limit would not be a violation. This allows for appropriate planning and the individual can be relaxed when the conditions are such that the premium just touches the limit but does not exceed it.

The impact

There is often no clarity on the extent of the taxation when the premium exceeds the specified figure and here too the conditions are very clear which is that if the condition is not fulfilled then the entire amount of the receipt would be taxable. The entire proceeds would be taxable in the year of receipt and this can be a big hit especially if the amount coming in is high and hence this is the reason why the individual would need to keep a careful eye out for the amount that they are paying as premium. One must note that if there is a death of the insured then the amount that is paid to the nominee would not be taxable even if the premium exceeds the limit set in this section. There has to be a clear distinction between these two conditions so if the amount is received by the policyholder either on maturity of the policy or when they are alive then this would be fully taxable and there would not be any relief available on this front.

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