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How to get tax benefits beyond the 80C limit for Life Insurance Premium?

How to get tax benefits beyond the 80C limit for Life Insurance Premium?

Life insurance plans are known for their tax benefits apart from the financial protection that they provide. The premiums paid for the policy qualify as a tax-free deduction under Section 80C of the Income Tax Act, 1961. However, Section 80C allows various other investments and expenses as deductions and the maximum limit of deduction is INR 1.5 lakhs. For example, investment into an ELSS scheme, NSC, PPF, EPF, etc. also qualify for deduction under Section 80C. Thus, most often than not, you might end up exhausting the limit of INR 1.5 lakhs on other investments. 

To provide you additional tax relief on your life insurance premiums, the Government has introduced an alternative avenue. In 2021, you can claim tax deduction on life insurance premium under the LTC scheme. Let’s understand what the scheme is all about and what tax benefit does it offer.

The LTC scheme 

A Leave Travel Concession (LTC) is allowed to salaried employees as a part of their salary component. Under the LTC benefit, the expenses incurred on travelling can be claimed as a deduction from your taxable income. Thus, the LTC scheme provides tax benefits on travel related expenses. 

What are the changes in the scheme?

Given the pandemic situation, many individuals did not take vacations or travel anywhere in 2020. Thus, salaried employees were not able to utilize the LTC benefit to reduce their tax liability. Considering this fact, the Government has allowed the LTC scheme to be widened to include other expenses for claiming tax benefits. If you buy goods and services, on which a GST of 12% or more is charged, 

Life insurance premiums have been included under the purview of the LTC benefit and you can claim a deduction under the LTC scheme for premiums paid. In other words, life insurance premiums can be claimed as a tax-free deduction even under the LTC scheme if your 80C limit has been exhausted.

Details of the changed LTC scheme

Here are some conditions which should be fulfilled to claim tax benefit on life insurance premiums under the LTC scheme –

  • You should be a salaried employee and have the LTC component in your salary structure
  • A new life insurance policy should be bought between 12th October 2020 and 31st March 2021 to claim this benefit
  • If you are already claiming a deduction under Section 80C on the premium paid, deduction under LTC scheme would not be allowed
  • If, however, you have not claimed deduction under Section 80C on the premium paid, you can choose to claim under Section 80C or under the LTC scheme

Limit of deduction

If you are claiming the deduction for life insurance premium under the LTC scheme, the maximum limit of deduction would be up to the amount of LTC allowed by your employer. This means that the maximum LTC component of your salary would be allowed as the maximum limit of deduction. You can claim a deduction on the actual premium paid or the LTC amount allowed in your salary, whichever is lower. 

The premium would include the premium inclusive of GST. Moreover, in case of single premium plans, you can claim deduction on the entire amount of premium paid while under regular premium plans, the deduction would be available only on the premium paid up to 31st March 2021.

The GST applicable on life insurance premiums depends on the type of policy that you buy. Thus, the amount of deduction that you can claim also varies depending on the policy type. Let’s understand with the help of an example.

Suppose you pay a premium of INR 50, 000, the deduction available would be as follows considering your LTC benefit amount is INR 1 lakh –

Type of life insurance policy

Premium amount

Applicable GST

Deduction that you can claim under the LTC scheme

Term insurance plan

INR 50,000

18% of the premium 

= INR 9000

INR 59,000

Unit Linked Insurance Plan

INR 50,000

GST is only levied on ULIP charges. Thus, no GST is charged on the premium 

INR 50,000

Immediate annuity policy

INR 50,000

18% on 10% of the premium paid 

= INR 900

INR 50,900

Endowment or money back insurance plan

INR 50,000

18% on 25% on the first year premium 

= INR 2250

INR 52,250

Even though the LTC benefit is INR 1 lakh, the actual premium paid would be considered for claiming deduction. If, however, the LTC benefit would have been INR 50, 000, the maximum deduction available would have been limited to INR 50, 000 even if the premium is higher in some cases.

What it means for you?

If you are looking to save additional taxes this year, you can utilize the benefit of the LTC scheme to reduce your tax liability. You can use Section 80C to claim deductions for other types of investments and expenses while the deduction for life insurance premium can be availed under the LTC scheme. Thus, you get a higher scope of deduction which would help you bring down your tax liability considerably, especially when you are in the higher tax brackets.

This is a limited period offer which would expire at the end of this financial year. So, what are you waiting for? Buy a new life insurance policy and make the most of the scheme.

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