We all know that Life Insurance Policies give insurance cover and are also eligible for deduction under Income Tax.
Here we will discuss in detail the manner, mode, and other aspects of deductions available under Income Tax in respect of Life Insurance policy premiums.
How Deduction is allowed in respect of LICs
From the Gross Total Income of an Individual and HUF, deduction u/s 80C to 80U are available under chapter VIA of Income Tax. However, the deduction under chapter VIA are not available from the following incomes :
(a) Long Term Capital Gains
(b) Short Term Capital Gains covered u/s section 111A
(c) Some incomes covered u/s section 115 such as 115A, 115AB, 115AC,115AD, 115BA, 115D
(d) Winnings from Lottery, horse race, etc.
Deduction allowed under which Section:
The deduction in respect of premiums paid under Life Insurance cover is available under Section 80C. There are various other schemes that qualify for deduction u/s 80C such as NSC, Tax Saving FDRs, P.O. Term Deposits, Sr. Citizen Saving Schemes, PPF, etc. The total deduction available u/s 80C is Rs.1.50 lakhs max.
LIC to be in the name of whom:
In respect of Life Insurance policies, the premium paid during the particular year qualifies for the deduction u/s 80C. The Life Insurance policy in the case of an Individual should be in the name of Self, spouse, or children only. In the case of HUF, the policy can be taken in the name of any member of the HUF.
Restriction of Deduction in respect of Capital Sum assured:
There is a restriction on the amount of deduction with respect to the capital sum assured in the Life Insurance policies. For the period on or before 31-03-2012, the deduction was restricted to 20% of the capital sum assured. From 01-04-2012, the deduction is allowed up to 10% of the capital sum assured only.
From 01-04-2013, if the policy is taken in the name of any person suffering from disability referred to in section 80U or any disease as provided in section 80DDB, the deduction is allowed up to 15% of the sum assured.
Holding Period of Investments:
There are also some minimum holding periods for which the investment should be done so as to qualify for deduction u/s 80C.
In respect of various Insurance policies, the holding periods are as under :
ULIPs 5 years
Normal Life Insurance Policies 3 years
If any investment is terminated or closed before the above maturity period, then the deduction allowed in earlier years would be deemed to be the income for the year in which the policy is terminated and will be taxed. Also, the premium, etc. paid in the year of termination will not be available for deduction.