Tax Issues Regarding Maturity of Insurance and proposed DTC Rules for insurance policies.

There are two pronged benefits on insurance policies. Firstly by way of a deduction under Section 80 C upto Rs. One lac in respect of premium paid on life insurance policy, secondly, on the money received from insurance company with accumulated bonus which is tax free under Section 10 (10D).

There are certain fine points you need to take note of while claiming tax benefits.

You are entitled for tax benefits for premium paid only if the insurance policy covers your life, your spouse’s and child’s life. As a parent you can claim the income tax benefit on the premium paid on the life of your child even though the child is not dependent on you. But if you pay insurance premium on the life of your dependent parent, then you cannot claim the benefit of Section 80 C.The Benefits of 80C is subject to 1 Lacs if Premium amount not exceeds 20% of Sum Assured. Now From Financial year 2012-13 this limit is brought down to 10% of Sum Assured.

Now let us look at the tax aspects of the monies received. Any money received in respect of Life Insurance policy together with the accumulated bonus is exempt fully from income tax under Section 10(10D) presently.

However, money received on your insurance policy together with accumulated bonus in respect of life insurance policy issued after 1^st April, 2003, will be fully taxable if the amount of premium payable on the policy is more than 20% of sum assured for any of the years during the term of the policy as explained above.

But any money received on death of the person insured will be tax free though the premium for any of the year might have been more than 20% of the sum assured of the insurance policy.

But you are entitled for all these benefits only if your policy is not terminated before premium in respect of two years has been paid. Moreover as a policy holder you should not allow the policy to lapse by reason of failure to pay the insurance premium before premiums in respect of two years has been paid. Whereas for ULIPs, the policy should remain in force for at least five years and should not either be terminated or allowed to be lapsed for failure to pay premium.

It is important to know that either in case of Life Insurance policies or ULIPs, if the policy is terminated or allowed to be lapsed, then aggregate of all the deductions allowed in earlier years, will be added to the income of the year in which such policy is terminated or allowed to get lapsed for non-payment.

This way you see that by properly studying your policy will not only benefit your heirs but also benefit you big time while claiming tax benefits. But the essence of this is that you ensure proper and timely payment of your premiums to reap the real fruits of your harvest.

Conclusion: In my opinion Income Tax of India going wrong way. America is changing its tax policy to charge more tax to the rich persons and less tax to poor peoples, but our country is going opposite manner. Taxation of our country is helping rich peoples to getting more richer and poor peoples for getting poorer. Insurance is the only most way for middle class peoples for getting exemption in tax but Income Tax is disappointing peoples by the way of DTC.