When you are investing or purchasing any financial instrument, one of the major factors you need to consider is its tax implication. You want to ensure that while creating wealth, your instruments also allow you to save taxes. This is one reason several individuals buy an endowment plan.
An endowment policy is a type of life insurance that also acts as a medium to save. When you buy one policy, similar to any other life insurance policy, you pay premiums. During the duration of the policy, in case of your sudden demise, your nominee will receive a sum assured by the policyholder. You can use a life insurance calculator to ensure that you have saved enough funds for the goals you want to achieve.
An endowment policy offers survival benefits in the form of maturity amount. You get a fixed amount which also comprises bonuses the company offers from time to time. Before you buy an endowment plan to make an informed decision, it is important that you know its tax implications.
Deductions on the premiums you pay
The premiums that you pay for your endowment plans are eligible for deduction under section 80C of the Income Tax Act. You can also claim the deduction if you pay for the endowment policy of your spouse or your child. Several individuals have a misconception that this deduction can be only availed if you have bought your endowment plan from a specific insurance provider. The reality is that the premium you pay towards your endowment plan to any insurance provider that is approved by the Insurance Regulatory and Development Authority of India (IRDAI) is eligible for a deduction under Section 80C.
If you have bought your endowment policy after 1st April 2012, to claim a deduction for it under section 80C, the premium you paid should not exceed 10% of the sum assured. For endowment plans that were bought before 1 April 2012, you can claim deduction only when the premium that you have paid for it does not exceed 20% of the sum assured. The deductions are claimed by taxpayers annually and Section 80C has the maximum deduction claim limit of Rs 1,50,000. You can use a life insurance calculator to calculate the premiums you pay annually. This deduction ensures that you secure your family, earn a maturity amount, and even save taxes with a single endowment plan.
Exemptions on the maturity of an endowment plan
The sum assured that your insurance provider gives after your endowment policy matures is exempt from taxes completely under Section 10(10D) of the Income Tax Act, provided that the premium paid on your endowment plan has not exceeded 10% of the sum assured if you purchased the plan after 1 April 2012 and 20% of the sum assured if you purchased the plan before 1 April 2012.
In case you have paid a premium of over 10% of the sum assured or 20% more than the sum assured depending on when you bought the policy, tax implications do come into the picture. This is because in such cases, the sum assured that your insurance company provides on maturity is fully taxable.
TDS on life insurance policy
From October 2014, if any amount that the policyholder receives from their life insurance policy is more than Rs 1,00,000 and is not covered under any exemption under Section 10 (10D), then a Tax Deducted at Source (TDS) of 1% is deducted by the insurance company from the payment that they need to make to the policyholder. In such scenarios, the insurance company also deducted TDS on any bonus payments that they are making. You can claim the credit for the TDS deduction while filing your income tax return.
Understanding these tax implications will help you realise the things you need to look for while buying an endowment plan. An endowment plan easily qualifies as a tax-saving instrument. It is important that you buy one after conducting the required research and choosing sufficient coverage. It is a perfect addition to every individual portfolio as it provides returns on savings while protecting the life of the policyholder.
