Want to know if your annual life insurance premium is tax-exempt? Read on

There is a small detail in the Income Tax (I-T) provisions of Budget 2020 that you might have missed: A life insurance policy without the cover being a certain multiple of the annual premium means you lose out on tax exemptions even if you pay as high as Rs 1.5 lakh for it annually.

The assumption is that the Finance Ministry has allowed policies with a cover which is seven times the annual premium to be tax-exempt. But that is not the case.

While a slew of life insurance products is now available with low ticket sizes, these policies will be eligible for Section 80C tax deduction only if the cover is 10 times the annual premium. So while making a decision, do consider more than the lower premium on offer.

In a bid to improve insurance penetration (as a percentage of GDP) in India, the Insurance Regulatory and Development Authority now allows products, where the sum insured, can be up to seven times the annual premium (compared to 10 times the annual premium earlier).

However, these are not tax-exempt.

For instance, if you pay an annual premium of Rs 20,000, the size of the policy has to be a minimum of Rs 2 lakh to avail Section 80C benefits. Thus, even if you pay the maximum exempt limit of Rs 1.5 lakh as insurance premium yearly, it is not eligible unless the cover is at least Rs 15 lakh.

As per Section 80C of the I-T Act, annual insurance premiums paid are tax-exempt to a maximum limit of Rs 1.5 lakh.

Insurance company officials said that many customers buy smaller covers since the premiums are lower, however, these are not only inadequate but may also increase their overall yearly expenses without underlying benefits.

There was an expectation that the 80C exemption limit would be reduced to seven times the annual premium. However, no such change was made in Budget 2020 by Finance Minister Nirmala Sitharaman.

Not all customers are aware that the income tax exemption is applicable to only a certain category of insurance products. Agents, too, have been unable to spread awareness on the tax provisions.

A few insurers are now considering only offering products with sum assured of 10 times the annual premium and above. This will not only prevent misselling complaints but also ensure that unaware customers do not buy inappropriate products.

Insurers have stated that tax exemption is not the primary reason for people buying a life policy, but the fact remains that it is at least a major consideration while buying a product.

Thus, making it clear that only some products offer tax exemption under 80C is crucial. If the commission structure is changed to offer a higher incentive of selling a 10 times annual premium cover, distributors will also fall in line.

Insurance is primarily an income-replacement tool in case the bread-earner of the family dies. Hence the focus should be on offering covers of a standard size depending on the annual earning capacity of an individual rather than pushing cheap products.