While investing in a term plan, you should know more about the premium types and what they entail. For instance, there are plans where you can pay one premium for the entire policy period. They are single-premium life insurance policies and offer the same coverage and benefits as their traditional counterparts.
Tenures of these policies are mostly ten years, although exits are possible after five years in many cases. Now comes the big question- will these policies get you tax benefits? Here is a brief look at this aspect.
Tax Benefits On Single Premium Policies- Section 10 (10D) Exemptions
Since it is a life insurance product, a single-premium insurance policy will also be eligible to claim tax deductions under Section 80C and exemptions under Section 10 (10D). From FY20-21 onwards, taxpayers can choose the old taxation regime for deductions and exemptions without opting for the new regime. This is because these deductions are not available in the latter. However, the maturity proceeds or death benefit from life insurance policies will have an exemption from taxes as per Section 10 (10D), even in the new tax regime. Therefore, you will only miss out on tax deductions under Section 80C in the new regime.
Now that you know the basic premise, let us return to the core premise- will a single premium policy get you these deductions, provided you opt for the old regime? A single-premium policy will be eligible for tax exemption on death benefits as per Section 10 (10D). The reason is that the proceeds arising from the policyholder’s demise will be tax-exempted without any other considerations.
For cases where the life insurance policy pays out maturity proceeds (other than term plans), there are some aspects to be noted for single-premium insurance policies). Tax exemption only applies if the minimum sum assured across the single premium policy tenure is at least ten times the single premium that you pay, as per the guidelines for policies issued on or post the 1st of April, 2012. The regulation mentions that the exemption applies if the premium for any financial year does not surpass 10% of the actual sum assured.
Suppose your premium is Rs. 15,000. In this case, the sum assured should be at least Rs.1.5 lakhs for the maturity benefits to be free of taxes. Meeting this condition means that the Section 10 (10D) benefit will not apply to your single premium insurance policy in cases other than payouts resulting from the policyholder’s demise. The insurance company will deduct TDS on these payments. It is 5% on any sum from the insurer as per Section 194AD of the Income Tax Act, in case the proceeds do not have exemptions as per Section 10 (10D) for policies where the sum assured is lower than ten times the premium.
Tax Benefits On Single Premium Policies- Section 80C Deductions
Premiums paid for life insurance policies are tax deductible up to Rs. 1.5 lakhs under Section 80C. However, for life insurance policies issued on or before the 1st of April, 2012, in case the premium surpasses 10% of the sum assured, then the deduction will be available till 10% of the sum assured amount, and the premium paid over this sum cannot be claimed as a deduction.
Experts state that the single premium payment should not cross 10% of the sum assured of the policy. Suppose you purchase a single-premium plan and pay an amount of Rs. 3 lakhs for the sum assured amount of Rs. 30 lakhs. In this case, the 80C deduction will be limited to Rs. 1.5 lakh of the premium amount. However, if you pay Rs. 3 lakhs, and the sum assured is Rs. 20 lakhs (higher than 10% of the sum assured), the deduction will come down to Rs. 20,000 under Section 80C (10% of the sum assured amount).
Experts also advise customers to refrain from surrendering policies within the first two years. Single premium policies surrendered in this period will have their past deductions under Section 80C taken as income for the year when the policy surrender takes place.
While purchasing a single-premium policy, you should select suitable life coverage, keeping your tax benefits in mind. Use a term plan calculator to understand the premium payable for your desired coverage. A single-premium policy is a hassle-free way to obtain life coverage if you can afford it. You only have to pay once, and coverage will last for a long time without the hassles of making payments every year.
