Section 80C of the Income Tax Act, 1961 lists various investments and expenses that can be claimed as a deduction from your taxable income. The section allows you deductions up to Rs.1.5 lakhs which help you save tax of up to Rs.45, 000 if you are in the 30% tax bracket.
Out of the various eligible deductions under Section 80C, life insurance premium is one of them. If you pay the premium towards a life insurance policy, the premium paid would be allowed as a deduction under Section 80C. However, since there are other investments and expenses too which are eligible under Section 80C, exhausting the limit of the section is quite a common problem. Can you claim a deduction for life insurance premium if the limit of Rs.1.5 lakhs is already exhausted?
Under normal circumstances, you would not be able to claim a deduction on the premium if the 80C limit is exhausted. However, for the current financial year, the Government has allowed a special deduction for life insurance premiums if the 80C limit has been exhausted. Let’s understand what this special deduction is all about.
Deduction under the LTC scheme
Salaried employees are allowed the Leave Travel Concession (LTC) benefit wherein the expenses incurred on taking a vacation are allowed as a deduction from the taxable income. However, given the pandemic, many individuals did not go on vacations and the LTC benefit was being wasted. To allow individuals the benefit of the LTC scheme, goods and services that attract 12% or more of GST have been included under the LTC benefit. This also includes life insurance premiums. So, if you have exhausted the 80C limit on other deductions, you can use the LTC scheme for availing deductions on life insurance premiums beyond Section 80C.
The conditions of claiming deductions under the LTC scheme are as follows-
- Salaried employees getting the LTC benefit can use this deduction
- You should buy a new policy between 12th October 2020 and 31st March 2021
- If the insurance premium is already claimed as a deduction under Section 80C, another deduction cannot be claimed under the LTC scheme
- Life insurance premiums can be claimed as deduction either under Section 80C or under the LTC scheme
- The limit of deduction would be the premium (including GST) or the LTC benefit allowed by the employer, whichever is lower
- Premiums paid up to 31st March 2021 would be allowed as a deduction.
- The GST rates on different types of life insurance plans are different. They are calculated as follows –
- Term plans – 18% of the total premium
- ULIPs – no GST is applicable on premiums
- Immediate annuity plans – 18% GST on only 10% of the premium amount
- Traditional saving plans – 18% GST on 25% of the premium amount
So, calculate the right premium amount that is eligible for deduction using these GST rates.
If you have exhausted the 80C limit and want deductions on your life insurance premiums, you can use the LTC benefit and claim additional deductions to save tax. Thus, term insurance plan allows enhanced tax benefits along with financial security and prove to be a valuable addition to your financial portfolio.
