Regarding life insurance, single-premium life insurance offers various tax advantages. You can benefit from deductions under Section 80C of the Income Tax Act at the time of investment, and the maturity amount can be tax-exempt under Section 10(10D).
However, exercising caution while purchasing these policies is essential, as failing to meet certain criteria might prevent you from accessing these benefits.
Since premiums are paid as a lump sum in single-premium plans, you might have questions about how this impacts tax obligations. Let’s explore this in more detail.
Different Tax Benefits of Single Premium Term Insurance
The following are the different tax benefits of a single premium term insurance plan:
- Deductions under Section 80C
As you may know, Section 80C of the Income Tax Act allows individuals to claim deductions of up to INR 1.5 lakhs on eligible investments in a financial year. Premiums paid for life insurance policies, including single premium term insurance, qualify for this benefit.
In the case of single premium term insurance policies, the deduction under Section 80C is limited to 10% of the sum assured. This means that to claim the full INR 1.5 lakhs as a deduction, the sum assured under your policy must be at least INR 15 lakhs.
- Deductions under Section 80D
For the maturity proceeds to qualify for exemption under Section 10(10D), the premium paid for the single premium life insurance policy should not exceed 10% of the sum assured. This means that the sum assured must be at least 10 times the premium amount paid.
For example, if you have purchased a single premium term insurance plan with a maturity value of INR 12 lakhs, and the premium paid is INR 1 lakh, the entire INR 12 lakhs is exempt from tax. However, if the premium paid is INR 1.5 lakhs for the same maturity value, the proceeds would be taxable as per the applicable income tax slab since the sum assured is less than 10 times the premium.
Conditions for Availing Tax Benefits on Maturity of Single Premium Life Insurance
You need to keep in mind key conditions to ensure that your single premium term insurance maturity proceeds are tax-exempt.
Condition 1: Premium Limit for Section 10 (10D) Benefits
Under Section 10(10D), the maturity proceeds of your policy are tax-free only if the total premium paid during the financial year is less than 10% of the sum assured. Let us look at two examples to clarify:
- Example 1: If you pay a single premium of INR 1 lakh, and your sum assured is INR 10 lakhs, the maturity amount will be tax exempted.
- Example 2: If you pay a single premium of INR 1 lakh but your sum assured is INR 9 lakhs, your premium exceeds 10% of the sum assured. In this case, the maturity proceeds will be taxable, and you or your nominee must declare it as income when filing the income tax return (ITR).
Additionally, your insurance provider will deduct TDS as per Section 194DA of the Income Tax Act, which imposes a 5% TDS on maturity proceeds if the premium paid exceeds 10% of the sum assured.
Condition 2: Aggregate Premium Limit from April 2023
Starting from 1st April 2023, tax benefits on maturity proceeds apply only if the total premiums paid across all your traditional life insurance policies do not exceed ₹5 lakhs. This rule excludes premiums paid for ULIP policies and does not affect policies purchased before 31st March 2023.
Tax Implications of the Single Premium Term Insurance
The following are the tax implications of term insurance if you do not meet the above-mentioned conditions:
- Premium Over 10% of Sum Assured
If the premium paid is more than 10% of the total sum assured, you won’t be able to claim the full deduction under Section 80C. Moreover, the maturity amount could become partially taxable depending on the policy terms.
- TDS on Maturity Amount
If the maturity payout exceeds ₹1 lakh, the insurance provider will deduct tax at source (TDS) at a rate of 5%. You can offset this TDS when you file your income tax return.
- Tax on Maturity Proceeds
Maturity benefits are typically tax-free if the premium remains below 10% of the sum assured. However, if the premium crosses the 10% threshold, the taxable portion is the difference between the payout and the premium paid. In such cases, you may claim indexation benefits to reduce the tax liability under long-term capital gains.
Hence, the tax advantages of a single premium term insurance plan are generally similar to those of regular life insurance policies, with comparable terms and conditions. Assessing your tax goals, budget, and other factors is important before choosing a single premium plan. Consulting a financial advisor or tax expert can also provide valuable guidance in making the right decision.
