80C Exemption LIC an overview

There is General Perception to taxpayers that All premiums paid for Life Insurance is eligible for deduction under 80C subject to overall Limit of 1.00 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 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 20% 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 20% 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 20% of Sum Assured i.e Rs 40,000 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 20% 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 20% of sum assured ,so Ram is not eligible to claim deduction on 40000 in FY 2010-11. Be Alert if your Policy premium due in March :So be alert ,if your premium amount is around 20% 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 aninsurance 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 20% 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 20% for any of the years during the term of the Policy ,However section 80C restrict benefit only up to 20% of the sum assured .So as per section 80C ,sum assured should be more than 5 times in the year of premium payment . From taking clue of the 80C ,Life Insurance corporation of India has launched a Single premium Insurance Policy in which First year (year of payment) the sum assured has been fixed 5 times of the premium paid and from second year onwards sum assured reduced to 2 times only . In brief for section 80C ,year of payment and sum assured is to be checked for 20% 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 20% of sum assured as "payable" has been used in the section.So effectively premium can be paid more than 20% 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 20% of sum Assured(100K) In My opinion section 10(10D) says that premium payable should not be more than 20% of sum assured .And in present case also premium payable is not more than 20% but actual Payment is more than 20% 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 30000.There is also a Facility to Top-up (pay additional premium on will).Satish paid the first premium of Rs 30000 in December 2009.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 20% of the Sum assured.so Whether satish is eligible for section 10(10D).In my opinion yes ,he is eligible ,as the Insurance premium payable during the policy term is restricted to 20% only (20% of 1,50,000=30000) but actual payment has only been paid in excess of 20% of sum assured.and section 10(10D) says only "premium payable" and not "premium paid" Relevant section are reproduced hereunder 10(10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than— (a) any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA or (b) any sum received under a Keyman insurance policy; or (c) any sum 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 twenty per cent of the actual capital sum assured: Provided that the provisions of this sub-clause shall not apply to any sum received on the death of a person: Provided further that for the purpose of calculating the actual capital sum assured under this sub-clause, effect shall be given to the 82[Explanation to sub-section (3) of section 80C or the Explanation to sub-section (2A) of section 88, as the case may be. Explanation.—For the purposes of this clause, “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person; 80C(2) The sums referred to in sub-section (1) shall be any sums paid or deposited in the previous year by the assessee (i) to effect or to keep in force an insurance on the life of persons specified in sub-section (4); (ii) to effect or to keep in force a contract for a deferred annuity, not being an annuity plan referred to in clause (xii), on the life of persons specified in sub-section (4): Provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity; 80C(4) The persons referred to in sub-section (2) shall be the following, namely: (a) for the purposes of clauses (i), (v), (x) and (xi) of that sub-section, (i) in the case of an individual, the individual, the wife or husband and any child of such individual, and (ii) in the case of a Hindu undivided family, any member thereof; (b) for the purposes of clause (ii) of that sub-section, in the case of an individual, the individual, the wife or husband and any child of such individual; (c) for the purposes of clause (xvii) of that sub-section, in the case of an individual, any two children of such individual. 80C(5) Where, in any previous year, an assessee (i) terminates his contract of insurance referred to in clause (i) of sub-section (2), by notice to that effect or where the contract ceases to be in force by reason of failure to pay any premium, by not reviving contract of insurance, (a) in case of any single premium policy, within two years after the date of commencement of insurance; or (b) in any other case, before premiums have been paid for two years; or (ii) terminates his participation in any unit-linked insurance plan referred to in clause (x) or clause (xi) of sub-section (2), by notice to that effect or where he ceases to participate by reason of failure to pay any contribution, by not reviving his participation, before contributions in respect of such participation have been paid for five years; or (iii) transfers the house property referred to in clause (xviii) of sub-section (2) before the expiry of five years from the end of the financial year in which possession of such property is obtained by him, or receives back, whether by way of refund or otherwise, any sum specified in that clause, then, (a) no deduction shall be allowed to the assessee under sub-section (1) with reference to any of the sums, referred to in clauses (i), (x), (xi) and (xviii) of sub-section (2), paid in such previous year; and (b) the aggregate amount of the deductions of income so allowed in respect of the previous year or years preceding such previous year, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year. Memorandum To clause 6 and 41 In Finance Bill 2003-04 Rationalization of the tax concessions in respect of insurance policies having the amount of premium more than twenty per cent of the actual capital sum assured Under the existing provisions contained in clause (10D) of section 10, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, (other than any sum received under a policy for the medical treatment, training and rehabilitation of a handicapped dependant under section 80DDA or any sum received under a keyman insurance policy), is exempt. Under the existing provisions of section 88, a deduction from the income tax payable is allowed to an individual or a Hindu undivided family (HUF), in respect of any sums paid or deposited in PPF, GPF, NSC, insurance premia, etc. The deduction is allowed at specified percentage of such sums. The insurance polices with high premium and minimum risk cover are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, it is proposed to rationalise the tax concessions available to such policies. It is therefore, proposed to substitute the clause (10D) of section 10, so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy in respect of which the premium paid in any of the years during the term of the policy, exceeds twenty per cent. of the actual capital sum assured. However, any sum received under such policy on the death of a person shall continue to be exempt. It is also proposed to clarify that the 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, shall not be taken into account for the purpose of calculating the actual capital sum assured under this clause. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.It is also proposed to insert a new sub-section (2A) in section 88 which seeks to provide that the deduction in respect of the sums paid or deposited as premium under an insurance policy shall be available only on so much of the premium or other payment made on an insurance policy, other than a contract for a deferred annuity, as is not in excess of twenty per cent. of the actual sum assured. It is also proposed to clarify that the 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, shall not be taken into account for the purpose of calculating the actual capital sum assured under this clause. The proposed amendment will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-2005 and subsequent years.