Fine print of claiming deduction on life insurance premium
The process of getting tax benefits from investments involves a lot of effort and a small mistake can lead to denial of the benefit.
February 15, 2013 / 15:06 IST
The process of getting tax benefits from investments involves a lot of effort and a small mistake can lead to denial of the benefit. Due to this reason there is a need to pay attention to the fine print when it comes to claiming this benefit. Take for example the very well known and used Section 80C where there is a tax benefit for various specified investments made during the year. While the broader area of benefit might be familiar like say payment of insurance premium there are several conditions that are related to this specific process that can impact the manner in which the benefit is finally claimed by the individual. Let us take the example of the life insurance premium to see some additional points that will help the individual tax payer in their efforts.
Persons coveredWhen the payment of insurance premium is considered on a life insurance policy then it is important to see the different kind of people who will be eligible for the benefit. This is significant in the sense that it should not be that the individual in the haste to get a tax benefit is paying premium for someone else and at the end of the day does not get the expected benefit. In case of an individual the benefit will be available for the premium paid for self, spouse and any child of the individual. This is the condition present so when the planning is being done it is important to consider this aspect carefully as premium paid for others could become ineligible.Premium coverageAnother aspect that needs to be kept in mind is that the premium amount also needs to be within the specified limits. There is a restriction that will come in to play for a single premium in the sense that the tax benefit is denied when the premium exceeds a certain percentage of the sum assured on the insurance policy. This is to ensure that these do not become investments products where the insurance is just in name and there is greater focus on the return that is being generated rather than the actual insurance cover that is available on the policy. The restriction says that the benefit will be available only to the premium that does not exceed 20 per cent of the sum assured. So for example if the sum assured is Rs 2 lakh and there is a premium of Rs 50,000 that is paid on the policy in the form of a single premium then the benefit will be restricted to Rs 40,000 for the purpose of tax deduction. Another important point is that while considering the sum assured the return of the premium would not be considered and nor would be any bonus that might be paid over and above the sum assured.Holding periodApart from all these conditions there is also the requirement that the individual will have to continue the payment of the premium for a specified time period to be able to claim the benefit. For a single premium policy if the contract is terminated within two years of the commencement of insurance then the benefit already taken would have to be reversed. If it is a normal premium paying insurance policy then the premiums have to be paid for a period of two years which would mean three premium payments in case of an annual premium payment because the first premium is paid at the start of the policy period so this will end up with a total of three payments before the required condition is fulfilled. The consequence of not fulfilling the holding period is that there is no benefit for the current year for the premium paid and all the previous benefits are reversed with the amounts being considered as income.Arnav Pandya can be reached at arnavpandya@hotmail.com. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
