There are life insurance policies with various payment modes and
policy terms. Life insurance companies design insurance plans to cater the
needs of various kinds of people. The risk coverage requirement and financial
needs vary from one person to another person. If you have access to sufficient
funds, you can choose a single premium insurance plan. However, you should also
consider the tax implications towards the single premium plan and regular
premium plan. The plan that fulfills your needs should be chosen so that you can
make the most of your investment.
Features of single premium plans
·
Means of risk protection
·
Offers savings similar to regular plans
·
The policy term is 10 years
·
You can exit the policy after 5 years
·
Tax benefits on the premium in the year of contribution under
Section 80C
·
Maturity proceeds are free from tax under Section 10 (10D)
Tax eligibility
Most of the single premium plans are eligible for tax deduction
under Section 80C and /section 10 (10D). However, some plans do not offer both
benefits. Hence, you should be aware of the terms and conditions of the life
insurance policy before buying the contract.
The tax exemption clause is based on the date of subscription to
the policy.
For policies issued on or after April 1, 2012
The exemption is permitted if the premium is less than 10% of the
‘sum assured’ in any financial year. The condition is applicable to all kinds
of life insurance policies including term policies. If the premium is above 10%
of the ‘sum assured’, you cannot get income tax deduction under Section 80C.
The maturity proceeds of a single premium life insurance plan will
be tax-free if the minimum ‘sum assured’ remains 10 times the single premium
throughout the insurance term. If the ‘sum assured’ is less than the 10 times
the single premium, you will not get income tax exemption under Section 10
(10D).
Example:
If the single premium is Rs. 5000/-, the ‘sum assured’ should be
above Rs. 50,000/- to get tax exemption from the maturity proceeds under
Section 10 (10D). If the ‘sum assured’ is Rs. 48,000/-, the tax benefits under
Section 10 (10D) are not available. Hence, you should pay income tax on the
entire proceeds.
If the single premium is Rs. 1,75,000/- and the ‘sum assured’ is
Rs. 20 lakhs, the policyholder can get a tax deduction on premium up to Rs.
1,50,000/-. The tax exemption is offered under Section 80C as the ‘sum assured’
is more than 10 times the premium. However, tax exemption will be limited to Rs.
1,20,000/- if the ‘sum assured’ is Rs. 12 lakhs. In this case, you will get
exemption up to 10% of the ‘sum assured’.
However, the proceeds are exempted from the tax if there is claim
due to the death of the policyholder. Regardless of the amount of premium, the
exemption will be offered when the policyholder goes through the risk.
The insurance company is liable to deduct tax at source on claim
payments. TDS of 1% will be deducted by the insurance company before paying the
amount to the beneficiary as the maturity amount is not exempted under Section
10 (10D).
Hence, you should ensure that the ‘sum assured’ should not be less
than 10 times the premium to get the benefit on maturity proceeds under Section
10 (10D).
How to protect the tax benefit maturity proceeds?
While buying the insurance policy, the insured should understand
the tax implications of the plan. The minimum sum assured by most of the
insurance companies is 1.10 times to 1.25 times the insurance premium. The
maximum sum assured will be in between 1.10 to 10 times the single premium
insurance.
If you buy a single premium life insurance policy during
your youth, it is possible to get maturity benefits 10 times the premium. If
you fail to get maturity value below 10 times the premium, the income tax
benefits under the Section 10 (10D) will not be available.
Tax implications on surrender of the policy
There will be a reversal of the tax exemption benefit under
Section 80C if the policy is surrendered within two years after the
subscription. The earlier exemptions will be treated as income in the financial
year in which the policy is surrendered.
Conclusion
While single premium policy offers certain benefits and
convenience, you should be aware of the tax calculations to make the most of
the insurance policy. The type of policy and timing of the policy will play an
important role. You should take an informed decision to get best tax deductions
under the Section 80C and Section 10 (10D). If you can get benefits under both
sections under varied conditions, you can opt for a single premium life
insurance plan.
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