When single premium policies deny you tax benefits

Here, we take a look at where tax benefit in respect of SPLI policy is unavailable.

Tax rules: The premium you pay for the SPLI policy is eligible for tax deduction under Section 80C of the I-T Act. You can take a maximum deduction of ₹1.5 lakh under this section. Further, the maturity proceeds (including bonus) received under SPLI policy issued on or after 1 April 2012 are tax-free if the premium payable for any of the years is not more than 10% (15% in the case of a person with a disability) of the actual capital sum assured. Sudhakar Sethuraman,partner, Deloitte India, said, “Where the premium paid is more than 10% (or 15% as applicable) of the sum assured, the insurer is required to deduct tax under Section 194DA at the rate of 5% of the maturity amount.”

Conditions

An individual who opts for the simplified tax regime (new tax regime) is not eligible for deduction under Section 80C. However, maturity proceeds from a life insurance company continue to be exempted under section 10(10D) in the new tax regime.

“You cannot claim deduction when the premium is less than the gross income. For instance, if the gross income of an individual is nil (after considering loss from house property and other exemptions), then you cannot claim deduction under section 80C of the I-T Act,” said Sethuraman.

This is also true where the maximum amount of deduction under Section 80C ( ₹1.5 lakh) is already exhausted by other qualifying investments or payments such as contribution to provident fund, repayment of home loan, etc.

If the premium you pay for the SPLI policy is more than 10% of the sum assured, you will not get the tax benefit. For instance, if the SPLI policy premium paid is ₹2 lakh and the sum assured is ₹18 lakh, then the premium is more than 10% of the sum assured. Hence, the SPLI policy premium of ₹2 lakh will not be eligible for a tax deduction.

Similarly, the maturity proceeds from the SPLI policy will remain tax-free only if the minimum cover is at least ten times the single premium paid for the policy. However, if the policy proceeds arise due to the policyholder’s death, then the sum assured is exempt from tax, irrespective of the level of the premium paid for the policy.