The Life Insurance Corporation of India, i.e., LIC, is one of the most esteemed and distinguished life insurance companies in the country, contributing immensely to the financial arrangements of numerous Indian families. Formed under a mission of providing financial security and stability, LIC provides numerous insurance policies that can offer customers benefits of risk coverage, accumulation of savings, and long-term investment benefits. In addition to providing the benefits of risk coverage, LIC also ensures that its life insurance policies are utilised as income tax planning, as per the provisions of the Income Tax Act 1961.
Various tax benefits offered by the government upon the payment of premiums, duration of the policies, and the settlement of the policies or the death benefits for the insured motivate many to purchase policies with the LIC by gaining favourable tax benefits calculated through the reduction of income with the help of the Act for the payment of the premium for policies with the LIC. Moreover, the maturity proceeds, bonuses, and death benefits from eligible LIC plans are either partially or fully exempt from income tax, rendering them highly tax-efficient.
Owing to the dual advantage of financial security and tax savings, LIC insurance has emerged as a favoured option among salaried individuals, professionals, and prudent investors. Its government endorsement, guaranteed benefits, structured savings approach, and long-term reliability enhance its standing as a trustworthy instrument for tax-saving and wealth protection in personal financial planning.
What is LIC Premium?
For the purposes of income tax, the premium paid by a taxpayer for a life insurance policy provided by the Life Insurance Corporation of India (LIC) and legally admitted as an investment for the purpose of availing an advantage under the Income Tax Act of 1961 is referred to as a LIC premium.
Definition of LIC premium
- A policyholder makes regular payments, which can be monthly, quarterly, semi-annual, annual, or a single premium, in exchange for their life insurance policy.
- This is the cost of procuring life insurance protection in addition to any savings or investments.
LIC Premium under the Act
- The premium liable for payment under an insurance contract with an insurance company comes under the category of an acceptable investment as per the Income Tax Act of 1961
- Eligible to avail tax benefits under sections 80C, 80CCC and Section 10D.
Deduction Under Section 80C
- Premiums paid on a life insurance policy might be deductible from the gross total income if paid during the year under consideration.
- The limit for allowable deduction is ₹1,50,000 annually, which includes other investments under section 80C.
Eligible Individuals
- Premiums paid for plans under one’s own name, that of one’s spouse, or that of one’s children can qualify for tax deductions.
- In the case of a Hindu Undivided Family, payments made as a premium on any member can be deductible as a deduction.
Premium Limit Condition
- Premiums issued on April 1, 2012, and later must not exceed 10% of the sum assured.
- There are certain impairment or disease restrictions, and when these are breached beyond 15%, deductions are made in that same ratio.
Tax Treatment of Benefits
- Maturity proceeds and bonuses accrue exemption from income tax under Section 10(10D), subject to the satisfaction of specific conditions.
- Nominees can receive tax-free death benefits without any restrictions.
Tax Recognition Purpose
The premiums paid in an LIC policy are tax-deductible with an aim of encouraging savings for the future and increasing the coverage offered by life insurance policies.
How Can LIC Premiums Help You Save Income Tax?
The Life Insurance Corporation of India has policies designed to provide not only financial protection but also act as strong vehicles for tax planning as per the provisions of the Income Tax Act, 1961. The premium paid on any LIC life insurance policy accrues tax benefits, either during the payment phase, policy maturity, or on a death claim. Such traits have placed LIC plans among the most sought-after tax-saving investment options among Indian taxpayers.
Tax benefits on premiums paid under LIC policies are covered under Sections 80C, 10(10D), and 80CCC of the Income Tax Act, 1961.
1. Deducting Tax Under Section 80C
- In the case of life insurance with the LIC, the premium paid is allowed as a deduction under Sec. 80C, read along with other investments and expenditures under the same section.
- The maximum deduction allowed under Sec 80C is: ₹ 1,50,000 per financial year.
- This cap is applicable to other investments, including PF and PPF, ELSS mutual funds, NSC, tuition fees, and the repayment of home loan principal. The overall limit includes LIC premiums.
2. Policies Eligible for Tax Benefits
- The money paid as a premium on a policy taken up by oneself, spouse, or children, either dependent or independent, is subject to tax deduction.
- Any member of a Hindu Undivided Family, having paid a premium, is eligible.
3. Conditions for Premium Payment Limit
The deduction allowed by Section 80C is subject to the following stipulations:
- For policies commenced before April 1, 2012, premiums must not be more than 20% of the amount of the policy.
- The cost of premiums shall not exceed 10% of the amount assured for policies effective from or after April 1, 2012.
- For policies issued after April 1, 2013, for those with a disability or disease, it was enhanced to 15% of the total assured.
- However, in case the premium exceeds definite levels, the reduction is capped at the stipulated percentages, as opposed to the full amounts paid.
4. Tax Benefits of Single Premium LIC Policies
- Single premium LIC plans are allowed under Section 80C.
- Such a deduction is made if the premium paid is in line with any of the 10%, 15%, or 20% rules of assured sum.
5. Other Deductions
- Any other beneficial deductions available with respect to the pension/annuity fund scheme under Section 80 CCC of the Act.
- Premiums paid towards LIC pension schemes such as Jeevan Akshay, New Jeevan Shanti, and so on, annuity, retirement schemes, etc., are eligible for a deduction under section 80CCC.
- The maximum deduction that can be claimed under Section 80CCC: The amount of ₹1,50,000 is included within the overall limit.
6. Tax Exemption on Maturity Proceeds – Section 10(10D)
- One of the biggest tax advantages offered by LIC plans is the exemption from tax levied on the maturity amount.
- Completely Tax-Exempt Income
- Section 10(10D) includes any receipt on the maturity, surrender value, or bonus payout, which is entirely free from income tax.
7. Conditions for the Section 10(10D) exemptions
However, this exemption is only applicable if the paid premium does not exceed 10 percent of the sum assured if the policies were initiated after 1st April 2012.
- 20% for older policies.
- 15% for special categories.
- If this condition is breached, taxation of the matured amount is triggered.
8. Tax-free Death Benefit
- Absolute Exemption is related to the sum paid to the nominee or legal heir after the death of the policyholder.
- 100% tax free benefit.
- This applies with or without any amount of premium, any date for the issuance of the policy, or any monetary amount whatsoever.
- Death benefit is exempt under Section 10(10D).
9. Tax Benefit for Bonuses Received
LIC policies typically offer:
- Reversionary bonus
- Final additional bonus.
These bonuses are included in the maturity proceeds.
10. No Capital Gains Tax on LIC Maturity
- The funds received on maturity of the policy do not suffer capital gains tax.
- The funds received on maturity are construed as exempt income if all the conditions specified under Section 10(10D) are met.
11. Tax Benefits Continue Even after Policy Assignment
- The tax rebate provided by Section 80C of the Income Tax Act is applicable even if a LIC policy is assigned to a spouse or a child.
- Assignment to another person may impact tax exemption.
12. TDS Provisions on LIC Payouts
Where maturity proceeds are not exempted under Section 10(10D):
- TDS @ 5% is deducted on the Income Part.
- No TDS is deducted in case of exemption.
Conclusion
The significance of LIC premiums is immense as it helps minimise the income tax burden on individuals and, at the same time, provides long-term security to individuals as well as society as a whole. The Income Tax Act 1961 offers a number of tax relaxations to promote investment habits among Indian citizens through life insurance policies, and therefore, policies taken from the LIC provide a two-fold security to individuals. The tax deduction on the premium paid to purchase an insurance policy is allowed under Section 80C and its allied provisions.
Along with the deductions arising from premium payments, tax benefits offered by these plans are substantial both at the time of maturity and in case of death, where, provided certain specific requirements are fulfilled, the tax-exempt status of both maturity amounts along with bonus amounts teamed with survivorship funds qualifies under Section 10(10D), while death payout amounts to individual recipients are tax-free with no monetary limitation applied.
Additionally, LIC helps in disciplined savings, provides a constant return, and ensures the financial well-being of dependents, which makes it a very attractive option, especially if an investor is extremely averse to taking risks. Consequently, when selected appropriately in accordance with tax laws, LIC premiums represent a reliable and legitimate means of income tax savings, while also fostering long-term wealth accumulation and family stability.
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