Most endowment plans offer guaranteed income, making them one of the best financial products for your future goals. They also offer other advantages, such as securing the financial future of your loved ones, low-risk savings, peace of mind and more.
However, endowment plans offer not just financial security but also a range of tax benefits. Let’s find out more about these in this article.
What is an endowment plan?
An endowment plan is a savings cum insurance financial tool that helps you secure your loved ones financially while preparing for your future financial goals. It offers a mix of insurance protection and savings. An endowment plan is not market-linked and carries low risk, which makes it ideal for risk-averse investors.
You can purchase an endowment plan by paying a regular premium at your chosen frequency, such as monthly, quarterly, semi-annually or annually. In return, the insurance provider provides you with a guaranteed payment at the end of the policy term when your plan matures. You can use this money to fulfil your financial goals, such as retirement, house ownership and others. Additionally, the endowment plan offers life coverage to the nominee in the unfortunate event of the policyholder's demise during the policy term, ensuring their financial stability amidst all odds.
What are the tax benefits offered by an endowment plan?
An endowment plan offers multiple tax benefits under The Income Tax Act, 1961, as explained below:
1. Tax benefits on the premium
The most well-known tax benefit associated with endowment policies in India is under Section 80C of The Income Tax Act, 1961. Section 80C allows you to claim a tax deduction on the premiums paid for an endowment plan. You can claim up to a limit of ₹ 1.5 lakh per financial year for as long as you pay the premium towards the plan. For example, if you pay regular monthly premiums every year for 30 years, you can claim a tax deduction of up to ₹ 1.5 lakh every year for the next 30 years.
However, it is important to understand that the ₹ 1.5 lakh limit under Section 80C is the maximum tax deduction you can claim for all qualifying investments combined. This section includes various investment options and savings instruments such as life insurance plans, Unit-Linked Insurance Plans (ULIPs), Public Provident Fund (PPF) and others. Therefore, the ₹ 1.5 lakh limit applies to the total amount you can claim for all these investments collectively, not individually.
2. Tax benefits on the death benefits
In the unfortunate event of the policyholder's untimely demise, the death benefit paid to the nominee is entirely tax-free under Section 10(10D) of The Income Tax Act, 1961. This tax-free status is applied to the death benefit, irrespective of the total value of the benefit received. This provision can help ensure that the grieving family receives the entire sum assured without any tax cuts and has all the financial help they can get during a difficult time.
For example, consider the example of Rahul, who purchased an endowment policy with a sum assured of ₹ 1 crore. Upon his untimely demise, his nominee, his wife, will receive the entire value of ₹ 1 crore without any tax implications.
3. Tax benefits on the maturity benefits
The maturity benefits from endowment plans enjoy tax exemptions under Section 10(10D) of the Income Tax Act, 1961, provided the annual premiums do not exceed 10% of the sum assured value. This allows you to fully benefit from the returns on your policy without owing any tax on the returns received. However, as per the 2023 budget, there has been a revision of the taxability of maturity proceeds. The revised laws state that if the total annual premium for endowment policies (one or more) purchased after 31 March 2023 exceeds ₹ 5 lakh in a financial year, the maturity benefits will be taxable on the income earned or gains made. Policies purchased before 31 March 2023 continue to enjoy tax exemptions on maturity benefits as applicable under the earlier laws.
4. Tax benefits on the surrender policy
You can enjoy tax benefits on the surrender of your endowment policy provided you have paid the premiums of the first two years of the policy in total. Moreover, the time of issue of the policy also determines the taxability as per the following rules:
o Policies issued before 31 March 2003: If your endowment policy was issued before this date, the entire amount received upon surrendering the plan is completely tax-free.
o Policies issued between 1 April 2003 and 31 March 2012: For policies issued within this period, the surrender value is exempt from tax if the sum assured is at least five times the annual premium paid. So, as long as your policy meets this criterion, you will not face any tax on the amount received upon surrender.
o Policies issued on or After 1 April 2012: For policies issued on or after this date, the surrender value is tax-exempt if the death benefit is at least ten times the annual premium paid towards the plan. If your policy meets this threshold, you can surrender it without incurring any tax on the value received. If not, you will owe tax as per the prevailing tax laws.
o Additional tax exemptions: There are further tax exemptions based on the premium relative to the death sum assured:
o For policies issued after 1 April 2003 but before 31 March 2012, if the annual premium is 10% or less of the death sum assured, the amount received upon surrender is tax-exempt.
o For policies issued on or after 1 April 2012, if the annual premium is 20% or less of the death sum assured, the surrender value is also exempt from tax.
To sum it up
Understanding the tax benefits of endowment plans is crucial for maximising your returns. It is important to carefully evaluate these benefits alongside the policy's overall returns and costs to ensure you are getting the most out of your investment. You must also know the specific conditions and limitations related to these tax benefits to fully leverage them. Additionally, as tax laws can change, staying updated on any legal modifications is essential.
For further clarification, you can consider reaching out to a financial advisor or contacting the insurance company.