Chance of Insurance deduction and exemption reduced

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The tax benefits on life insurance polices , in form of exemption and insurance deduction u/s 80C -have been reduced considerably by the Finance Bill 2012-13 by proposing amendment in section 10(10D) and section 80C(3) of the Income Tax Act effective  from 01/04 /2012 . Readers must be aware that these two provisions  bring tax benefits to every life insurance policy holders as section 10(10D) exempts any amount receipt from insurance policy whereas section 80C(3) provides insurance deduction  on life insurance u/s 80C upto  Rs 1 lakh.

Amendment to 80C regarding  insurance deduction

The deduction for payment of  premium up to Rs 1 lakh is eligible for insurance deduction u/s Section 80C of the Income-tax Act . However,the existing provisions contained in section 80C(3) provide that thelifeInsuranceBudget deduction for life insurance premium shall be allowed  for only so much of any premium or other payment made on an insurance policy as is not in excess of 20% of the actual capital sum assured.

The Finance Bill 2012-13 has now  proposed to amend the provisions u/s 80C(3)  to provide that insurance deduction for life insurance premium as regards insurance policies issued on or after 1st April, 2012 shall be allowed for only so much of the premium payable as does not exceed 10% of the actual capital sum assured.

Amendment to section 10(10D) about exemption of life insurance amount

Under section 10(10D) of the Income Tax Act ,  receipt of any payment on life insurance policy  is tax free  in following two circumstances :

  1. When the receipt form life insurance policies on death of person whose life was assured.
  2. When the annual premium was less than 20 % of sum assured

What is definition of “actual capital sum assured” ?

The  Finance Bill 2012-13  has also  proposed to insert the definition of “actual capital sum assured”  by which it has been provided that  the actual capital sum assured  shall be the minimum amount assured under the policy without taking into account—

    • (i) the value of any premiums agreed to be returned, or
    • (ii) 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.

This definition is also referred to in the proposed Explanation 2 in section 10(10D).

Therefore, one has to be careful while subscribing any new policy from 01/04/2012 as the chance for insurance deduction and exemption have considerably reduced.


  1. “When the annual premium was less than 20 % of sum assured”

    I received payment from LIC recently on my own life policy. Premiums paid were in the above limit.

    Is this payment taxable?