Income from life insurance is not always tax free!

Published: Tuesday, February 4, 2014, 8:51 [IST]

It is commonly believed that the amount we get as maturity benefit from our life insurance policies is tax free. As a result, a lot of people get a rude shock when they find out that the amount is taxable. Did
you know there are two conditions that you have to meet in order to assure your amount is tax free?

Well, if you don't know it, you are not alone. A vast number of people are still in the dark about this rule and so end up making precious mistakes that cost them a lot later on. If you want to know how you can make your maturity benefit tax free, then read on and find out the clauses of section 10(10)D of the
Income Tax Act.

The two main conditions under section 10(10)D

1. Duration - As per this clause, the amount of money you invest in your life insurance policy has to remain invested for a minimum of 5 years. If you make any withdrawal in these 5 years, you cannot avail the tax benefit. If this condition is met then your maturity benefit will be tax-free.

2. Ratio - The second condition here is that the policyholder has to maintain a ratio of 1:5 between the premium and the sum assured. This ratio has to be consistent throughout the policy tenure and if it has been lesser than that for even one year, the maturity benefit will not be tax-free.

10(10)D advantage in traditional policies

The traditional policies like endowment plans, whole life plans and money back plans automatically help you in achieving the 10(10)D benefit. This is because they are designed in such a way that you have to compulsorily pay a premium which is 1/5th act. This makes it very convenient for the policyholder as he/she doesn't have to go through rigorous calculations to ensure that the sum assured is 5 times the premium. So if he/she doesn't make any withdrawals during the tenure of the policy, a tax-free benefit can be received.

10(10)D in ULIPs

The equation isn't quite as simple in the case of unit linked insurance plans or ULIPs. For ULIPs bought prior to September 2010, the sum assured isn't automatically 5 times the premium. A policyholder should be careful and run the calculations intelligently to get a tax free maturity benefit or else the maturity amount will not be tax free. All ULIPs bought after that is however included in this bracket.

Here however, it is important to remember that a policyholder must choose to opt for a sum assured of
5 times the premium paid, as the possible minimum sum assured in a single premium policy is only 1.25 times the premium paid. If the policyholder opts for a sum assured of less than 5 times, he/she will not get the tax benefit at the time of maturity.

Conclusion

The new guidelines under section 10(10)D of the Income Tax Act are easy to understand. Since most

policies automatically take care of the ratio factor, you can almost always benefit from this rule.

However you must remember not to make any withdrawals as that will prevent you from getting a tax-
free maturity benefit. If you are buying a ULIP, keep the calculations in mind and you can easily take

advantage of the tax norms under section 10(10)D of the Income Tax Act.

Written By: Deepak Yohannan

The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com

You may contact him directly on Twitter: @dyohannan

Story first published: Tuesday, February 4, 2014, 8:51 [IST]