Top 5 tax benefit questions asked by insurance buyers

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When you sell insurance to your clients, the most common query which you often come across is the tax implication on insurance policies. Every client of yours wants to save the maximum possible tax outgo and knowing that insurance policies provide tax benefits, your client is eager to know the tax advantages he/she can get from buying a policy. The basic advantages provided by Section 80C (for life insurance policy premiums) and Section 80D (for health insurance policy premiums) are known by many. It is the other technical tax-related questions which might leave you and your clients stumped. As an expert insurance advisor, it is your duty to clear any doubt which your customer has before buying the policy. So, here are five of the most common tax-related questions asked by customers and their respective answers for your knowledge–

 

Question #1-Can I claim for the medical expenses for my wife as a deduction under the Income Tax Act?

 

Section 80D of the Income Tax Act allows an individual tax deduction on the premiums paid towards a health insurance policy affected for self, spouse, dependent children, and dependent parents. If therefore, your client is buying a health insurance policy for his wife, the premium paid would be allowed as a deduction under Section 80D up to a maximum of INR 25, 000 which would increase to INR 50, 000 if the client is a senior citizen. Moreover, if your client pays for the medical expenses of his wife towards preventive health check-ups, he can avail an additional deduction of up to INR 5000 under Section 80D.

 

Question #2-Are all insurance maturity benefit tax-free?

 

Section 10(10D) exempts the maturity and death benefits paid under life insurance policies in the hands of your clients. However, there are exceptions. There are some cases in which maturity benefits are taxable. These cases are as follows–

 

  • In a policy issued on or after 1st April 2003 but before 31st March 2012, if the premium is more than 20% of the sum assured, the entire maturity benefit would be taxable

 

  • In a policy issued on or after 1st April 2012, if the premium is more than 10% of the sum assured, the maturity benefit would be taxable

 

  • Benefits received under a Keyman policy are taxable

 

  • In a policy issued on or after 1st April, 2013 for a person having a severe disability (as defined under Section 80U) or an ailment (as defined under Section 80DDB), if the premium is more than 15% of the sum assured, the maturity benefit would be taxable

 

Question #3-Are pension plans completely tax-free like Life Insurance?

 

Though pension plans are offered by life insurance companies, they do not enjoy the same tax benefits like other life insurance policies do. The premiums paid for pension plans qualify for tax deduction under Section 80CCC up to a maximum of INR 1.5 lakhs. In case of policy benefits, 1/3rd of the maturity proceeds can be withdrawn. This is called commutation of pension and is tax-free under Section 10 (10A). The remaining 2/3rd of the corpus is compulsorily paid as annuity installments and each installment would be taxable in the hands of your clients as per their income tax slab rate.

 

Question #4-If I stop paying premiums on my life insurance or pension policies can I claim Tax Benefits?

 

If your client has stopped paying premiums under a life insurance policy, tax benefits would be allowed only if certain conditions have been fulfilled. These include the following–

 

  • If the policy is a unit linked plan, your client should have paid the premiums in full for the first 5 years of the policy

 

  • If the policy is a traditional savings plan, your client should have paid premiums for at least the first 2 years of the plan

 

If the premiums have been paid for the specified duration and the policy was held by your customer during such duration, tax benefits would be available. If, however, the above-mentioned conditions have not been fulfilled, the tax benefit would not be available. Moreover, the benefit allowed on premiums in the previous years would also be reversed.

 

Question #5-Is Maturity Benefit in Insurance Policies subject to TDS?

 

If the maturity benefit qualifies for deduction under Section 10 (10D), no TDS would be payable. If, however, the maturity benefit does not qualify for exemption under Section 10 (10D), TDS @1% would be applicable if the maturity amount is more than INR 1 lakh.

 

Know the answer to these five tricky tax-related questions which your customers might have so that you can be a true advisor to your clients and help them enjoy maximum tax benefits.

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