Single premium life insurance: Are you eligible for tax benefits?

Dec 05, 2017 | 1 year ago | Read Time: 3 minutes | By iKnowledge Team

What is a Single Premium Life Insurance?

A Single Premium Life Insurance(SPLI) is a life insurance policy wherein a lump sum is paid in return for death benefit that is guaranteed until your death. Irrespective of your position on the team, your efforts are rewarded with a medal when your team wins the tournament. Similarly, whether it is a single premium life insurance (SPLI) or recurring premiums, you are eligible for tax benefits under Section 80C of the Income Tax Act, 1961. In fact, your maturity proceeds on the SPLI are also tax-free. Let’s look at the taxation structure for a policy with single premium payment.

Life insurance taxation

The tax benefits for life insurance is usually defined as EEE (exempt-exempt-exempt). This means that your investments in life insurance for you, your spouse and your children are tax-free under Section 80C. However, remember that there is a cap of Rs 1.5 lakh. The returns during the accumulation phase also enjoy a tax exemption. The third tax exemption is at the time of withdrawal.

80C for Single Premium Life Insurance (SPLI)

While single premium policy is also a life insurance, it has certain limitations if you want to claim deductions under Section 80C. You are eligible to claim the deductions only if the sum assured is at least 10 times the single premium paid. Also, remember that there is a limit to claiming a deduction under Section 80C for your single premium life insurance, which is Rs 1.5 lakh. Additionally, early exit from the policy could be detrimental and you might have to shell out additional tax in the year you abandon the policy.

Maturity exemption details

The maturity proceeds are also tax-free if the above conditions are met. To reiterate, for the maturity proceeds from any SPLI to be tax-free, the sum assured throughout the policy duration must be at least 10 times the single premium.

Examples

Claiming the tax deduction:

If you bought a life insurance with sum assured of Rs 15 lakh by paying a single premium of Rs 1.5 lakh, you can claim the entire amount for deduction. However, let’s say your sum assured is Rs 10 lakh for a single premium of Rs 1.5 lakh. Then, you could claim a deduction of only Rs 1 lakh. Say, your life insurance policy has a sum assured of Rs 40 lakh with a premium of Rs 2 lakh. Then, though you’ve fulfilled all criteria, you could still claim only Rs 1.5 lakh due to the maximum cap.

Exemption on maturity proceeds

Say, your amount on maturity is Rs 15 lakh and you had paid a single premium of Rs 1.5 lakh. Then, you stand to get entire Rs 15 lakh, without any tax deductions. However, if your insurance proceeds are Rs 15 lakh and you had paid a premium of above Rs 2 lakh, then your Rs 15 lakh on maturity would be taxed according to your tax slab. Also, any proceeds that aren’t exempted under Section 10(10D) would attract a tax deposited at source (TDS) of 1%. 

Exemption on death benefits

If your nominee receives the amount of your single premium life insurance, then the entire amount would be tax-free under Section 10(10D). This is unconditional.

To sum up

Insurance investments provide you the dual benefits of securing your loved ones’ future and saving your present taxes. The former would be the insurer’s responsibility. However, you need to ensure that you utilise the second benefit. To do so, you need to ensure that you fulfill the requirements mentioned above when buying a SPLI. To avail the above tax benefits, you could invest in a SPLI at Aegon Life.

Get a detailed explanation on tax sections under 80C, 80CCC & 80CCD here. Know about the interest imposed due to late filing of income tax return under section 234A, B & C here.


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