Deduction under 80 C and 10(10)(d)

There is General Perception to taxpayers that All premiums paid for Life Insurance is eligible for deduction under 80C subject to overall Limit of 1.50 Lacs .Further They also think that all sums received from Insurance Company against Life insurance Policy is exempted under section 10(10D). This reason behind it is that on every Insurance Policy or premium receipt ,this wording is printed that Life insurance premium is eligible for deduction under section 80C and Maturity is tax free Under Section 10(10D).

But this is not 100% correct .80C deduction as well as 10(10D) exemption is available subject to some conditions.what are these conditions we are discussing in this post.

Deduction allowable from Income for payment of Life Insurance Premium (Sec. 80C).

1.  Life Insurance premium paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in the case of HUF, premium paid on the life of any member thereof, Provided premium paid is not in excess of 15% of capital sum assured( Rule applicable on Policies taken after 01.04.2003).
2. Contribution to deferred annuity Plans in order to effect or to keep in force a contract for deferred annuity, on his own life or the life of his spouse or any child of such individual, provided such contract does not contain a provision to exercise an option by the insured to receive a cash payment in lieu of the payment of annuity is eligible for deduction.
3. Contribution to Pension/Annuity Plans - New Jeevan Dhara-I.

So as per (1) above premium paid up to 15% of The sum assured is available for deduction . Further Sum Assured does not include

• value of any premiums agreed to be returned, or
• of any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.

Suppose :A has taken a Life Insurance policy with a sum Assured 2 Lakhs and paid a Premium of Rs 60,000 In Financial Year 2009-10.
In this Case A is eligible to claim 15% of Sum Assured i.e Rs 30,000 out of Total premium paid RS 60000 under section 80C.

Further Above rule is applicable on policies issued on or after 01.04.2003.So if Policy is issued before 01.04.2003 then you can claim full premium paid under section 80C without considering 15% Limit.

Now Check one more particular case ,
Suppose Ram has taken a Policy in March 2009 ,with sum assured as 1,00,000 and annual premium as 20,000.In March 2010 he misses to deposit the premium .And what is eligible amount under section 80C if he pay march 2010 premium in April 2010 and March 2011 premium in Time i.e in March 2011.

In present case even though the premium paid in Financial Year 2010-11 is related to two different Financial years ,yet deduction is to be restricted to 15% of sum assured .

Be Alert if your Policy premium due in March :So be alert ,if your premium amount is around 15% of the sum assured and Premium is due in March 2010 then pay the premium in March 2010 it self ,otherwise you will have to face same problem as faced by Ram in above example.

Lock In period:Lock in period has also been fixed under section 80C.Assessee can not terminates contracts of Life insurance

1. Single Premium:with in two year from the the date of commencement(start) of Policy in case of Single premium policy and
2. In other case:In other case before payment of Two years Insurance premium .

If  you violates above rules then deduction claimed in earlier years will be added in the Income of the previous year  in which rules are violated.

Now Takes The Maturity Proceeds and Tax issues.

Tax Exemption On Maturity Amount of Life Insurance Policy under Section 10(10D)


Under the provisions of section 10(10D) of the Income-tax Act, 1961, Maturity/Death claims proceeds of life insurance policy, including the sum allocated by way of bonus on such policy is exempted from income-tax. However any sum (not including the premium paid by the assessee) received under an insurance policy issued on or after the 1st day of April, 2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 15% of the actual capital sum assured will no longer be exempted under this section.

Further maturity amount received in Key Man Insurance Policy and amount to be refunded under Section 80DD Insurance Plan in case of handicapped dependent predeceases the individual ,is also not exempted under this section.

This section 10(10D) is more strict than 80C provisions .As per 10(10D) ,exemption is not available if premium payable is more than 15% for any of the years during the term of the Policy ,However section 80C restrict benefit only up to 15% of the sum assured .So as per section 80C ,sum assured should be more than 6.66 times in the year of premium payment .
  .

In brief for section 80C ,year of payment and sum assured is to be checked for 15% clause . However in case of 10(10D) this clause is applicable through out the policy term.

Moreover the wording used in section 10(10D) is related to policy design .The word used in the section is
"in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured"

so in my opinion section 10(10D) stipulated that premium should not be due more than 15% of sum assured as "payable" has been used in the section.So effectively premium can be paid more than 15% in a year if it is not due in that year.

Lets takes the example :Ram Given above.If Ram Pays Two premium in Fy 2010-11 one is due in March 2010 and other is due in March 2011 ,then whether he can claim exemption under section 10(10D) as total premium paid(20+20=40K) is more than 15% of sum Assured(100K)

In My opinion section 10(10D) says that premium payable should not be more than 15% of sum assured .And in present case also premium payable is not more than 15% but actual Payment is more than 15% of sum assured so still Ram is eligible to claim exemption under section 80C.

Now takes another example
Satish has taken a Unit Linked insurance Policy for a sum assured of 150000 and annual premium payable is 22,500. There is also a Facility to Top-up (pay additional premium on will).Satish paid the first premium of Rs 22,500 in December .In January also paid the Top up of Rs 1000 in the Policy .

In above case also premium paid in Fy 2009-10 is more than 15% of the Sum assured.so Whether satish is eligible for section 10(10D).In my opinion yes ,he is eligible ,as section 10(10D) says only "premium payable" and not "premium paid"