Finance Bill 2012-13 has proposed some amendments in tax benefit on life insurance policies by way of ‘exemption on sum received’ under section 10(10D) and ‘tax deduction on life insurance premium’ upto Rs 1 lakh under section 80C of income tax act 1961. It is been proposed to reduce the tax deduction threshold limit on premium payable from 20% of the total sum assured to 10% of the total sum assured. The proposed exemption and deduction will be applicable on the life insurance policies issued on or after April 1st, 2012. After implementation of these amendments, any sum received from insurance company against a life insurance will be tax free in following two cases:-
- On death of insured person to his/her nominee
- When the annual premium paid for the policy was less than 20% of sum assured. To elaborate this point, lets assume that a person buys an insurance policy with certain cash-back after every few years, then the cash back (receipt from the policy to the insured person when he/she is alive) will be tax free under 10(10D) only when the premium paid every year was less than 20% of the total sum insured. Take an example that Mr. X buys a Insurance policy with sum assured of Rs. 10 Lakhs and pays a premium of Rs. 18,000 per year, under this scheme he gets a cashback of Rs. 50,000 every 5 years. In this case, since the annual premium is 18% (Rs 18,000 compared to Rs. 10 Lakhs sum assured) which is less than 20%, so the cashback will be tax free under 10(10D). Mr. Y buys a policy of Rs. 10 Lakhs sum assured but with an annual premium of Rs. 35,000 and cashback of Rs. 1,00,000 every 4 years, then the cashback will not be tax free as the annual premium paid for the policy Rs. 35,000 is 35% of the sum assured.
As Per Proposed Finance Bill 2012-13
Amendment Under Section 10(10D)
Any sum received from a life insurance company against a life insurance policy including the sum allocated by way of bonus on such policy, is exempt from tax if the policy premium payable for any year does not exceed 10% of the actual capital sum assured whereas the present provisions allow exemption if the annual premium does not exceed 20% of the actual sum assured.
Under Section 80C of the income tax act 1961
The deduction for payment of premium upto Rs 1 lakh is eligible for tax deduction, if the premium paid for the policy does not exceed 10% of the actual capital sum assured. In present provisions, this limit is 20%.
The section 80 C Amendment is targeted to reduce the amount of deduction available to customers for insurance policies which have higher premiums because of other than pure insurance benefits like cashbacks and other kind of returns. Typically, term insurance policies have lower premiums while other kind of policies which have higher returns, but lower sum assured and command higher premium will be discouraged as the tax deductions will be limited to lower limits.
The amendment to section 10(10D) is targeted to discourage the misuse if insurance policies which are designed with higher premiums and higher returns, such policies have higher preference to to save tax rather than to provide ample insurance cover at reasonable price. Such policies cause money to circulate back to the insured in some ways which is a legal way (or loophole of the system) to evade tax.
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