Single Premium Life Insurance - Tax Advantages & Benefits

What would you do if you suddenly received a windfall or found a large amount of your money lying idle? A vacation would be great, or maybe you want to revamp your home. While there are plenty of things, you could do with some extra money, an advisable move would be to get a Single Premium Life Insurance (SPLI) policy, especially if you have dependants.Single Premium Life Insurance provides your beneficiaries a lump sum death benefit when you are no longer around to take care of them. You have the freedom to customise these policies by selecting coverage and benefits that suit your financial goals and needs. Some policies also offer additional features, like maturity benefits, where you receive a lump sum amount at the end of the policy term.This policy offers simplicity and convenience and ensures a financially secure future for your loved ones.

• Flexible terms: A Single Premium Life policy offers flexible terms, such as death and maturity benefits, range of coverage, etc. This ensures you can customise the plan as per your requirements.
• Instant coverage: Unlike some insurance policies, Single Premium Life Insurance has no waiting period, so the coverage kicks in immediately after purchase. This is especially beneficial if you have a high-risk job.
• Convenience: With this policy, you do not have to worry about lapses or missed due dates. Since you pay the entire premium in one go, you will not have to deal with missed payment deadlines. The one-time payment feature makes it extremely convenient.
• Loan facility: Some Single Premium plans offer a loan facility option after completing a certain tenure. This means that if you ever need urgent funds, you can use this policy as collateral to borrow money to meet other needs.
• Investment option: If you are reviewing policies as a viable investment option, you can consider Single Premium Life Insurance. Although the one-time premium payable is higher than a regular premium, you get better maturity and death benefits over an extended period.

Also, the investment builds up faster in a Single Premium Life insurance. The death benefit offered is according to the amount invested and the policyholder's age. From an insurer’s view, obtaining the policy while still young means you have a longer life expectancy. Thus, the funds have more time to grow before the benefit is expected to be paid out.

Like other insurance policies, Single Premium Life Insurance offers a tax deduction on the premium under Section 80C. Apart from this, there are other tax benefits that you can avail of, depending on certain conditions. This is because the tax rules for Single Premium Life Insurance policies can differ based on the features and other details. Here’s what you should know.

Deduction under Section 80C

As you know, you can claim tax deductions of up to ₹1.5 lakhs on investments made during any financial year under Section 80C of the Income Tax Act. The premium you pay on your Life Insurance policies is also eligible for deduction under this section.With Single Premium Life Insurance policies, you can claim a deduction under Section 80C to the extent of 10% of the sum assured. In other words, if you want to claim the entire ₹1.5 lakhs against the premium payment for your Single Premium Life policy, your policy’s sum assured should be at least ₹15 lakhs.Here’s an example to help you understand this better. Let us say you buy a Single Premium Life policy in the financial year 2023-24. Case 1: You pay a single premium of ₹1 lakh for the policy, and the sum assured is ₹10 lakhs. In this case, you can claim the entire ₹1 lakh as a deduction under Section 80C of the Income Tax Act. Case 2: You pay a single premium of ₹2 lakhs for the policy, and the sum assured is ₹20 lakhs. In this case, you can claim the maximum deduction allowed under Section 80C of ₹1.5 lakhs. Case 3: You pay a single premium of ₹1 lakh for the policy, and the sum assured is ₹2 lakhs. In this case, you can only claim a maximum deduction of ₹20,000 or 10% of ₹2 lakhs.Remember, you cannot claim a deduction under Section 80C if your other qualifying investments, such as contribution to a Public Provident Fund or repayment of a home loan , already breach the cap of ₹1.5 lakhs.

Tax on maturity proceeds

There are some important conditions you must be aware of when it comes to availing of tax benefits on maturity proceeds of your Single Premium life insurance policy .

Rule 1

Rule 2

• Under Section 10(10D), your maturity proceeds are tax-exempt only if your total premium payments during the financial year are less than 10% of your total sum assured. Let’s understand this with an example. Case 1: You pay a single premium of ₹1 lakh during the financial year. The sum assured of your policy is ₹10 lakhs. In this case, your maturity proceeds are exempt from tax. Case 2: You pay a single premium of ₹1 lakh during the financial. The sum assured of your policy is ₹9 lakhs. In this case, your premium is more than 10% of the sum assured, so you lose the benefits under Section 10(10D). This means you or your nominee will have to pay tax on the maturity proceeds in the year of receipt.You or your nominee must show this amount as income while filing income tax returns (ITR) for that particular year. Additionally, your insurance company is liable to deduct TDS (Tax Deducted at Source) on these payments.As per Section 194DA of the I-T Act, the maturity amount is subject to a TDS of 5% if the premium paid exceeds 10% of the sum assured.
• Effective 1st April 2023, you can avail of tax benefits on maturity proceeds only if the sum of your premiums for all traditional Life Insurance policies does not exceed ₹5 lakhs. This limit does not include the premiums on your ULIP policies. It also does not apply if you bought the policies before 31st March 2023.

Deductions under Section 80D

The deduction under Section 80D is applicable only if you opt for health-related riders under your Single Premium Life Insurance policy.You can claim a TDS refund when filing tax returns for the year in case your insurer wrongly deducts it.

Death benefit proceeds

Regardless of the premium amount, proceeds arising from the insured’s death are exempt from any type of taxation in a Single Premium Life Insurance policy.

New tax regime:

Since 1st April 2023, the new tax regime or simplified tax regime has become the default tax regime unless you opt for the old one. If you choose to switch to the new tax regime, you cannot avail of any deductions under Section 80C. A quick recap of important terms and conditions of SPLI policy

• To claim tax benefits, your premium payment on a Single Life Insurance policy cannot be more than 10% of the total sum insured.
• You can avail of 80C deductions only up to 10% of the sum insured.
• Your insurer will deduct a TDS of 5% on policy maturity proceeds if your premium is more than 10% of the insured value.
• Deductions under 80D are only available if your Single Premium Life policy includes health-related riders.
• No deductions under 80C will be available if you choose the new tax regime.

Also read: Is Your Single Premium Life Insurance Policy Eligible For Tax Benefits?

Some key terms to know when searching for a suitable SPLI:

• Section 10(10D): The section provides exemptions from income tax on the proceeds received from a life insurance policy upon maturity or in the event of the policyholder’s death.
• Section 80C: An Income tax section that allows individuals to claim deductions for certain investment instruments. Premiums paid for Regular Premium Life Insurance and some SPLI policies are eligible for deductions of up to a total of ₹1.5 lakhs under this section.
• Tax-deferred growth: Growth of the cash value within a Single Premium Life Insurance policy on a tax-deferred basis. Investment gains or earnings within the policy are not immediately subject to taxation.
• Exempt-Exempt-Exempt: The category refers to tax exemptions on investment, growth, and maturity proceeds or death benefits of certain financial instruments, including Single Premium policies.
• Surrender value: The amount the policyholder receives upon surrendering or cancelling a Single Premium Life Insurance plan before it matures. Tax implications on surrender value may vary based on the policy and tax laws.
• Premium allocation: The division of the Single Premium between insurance coverage and investment portion determines the premium allocation towards each component.

• Single Premium policies offer convenience as you do not have to worry about making regular premium payments throughout the policy term.
• You receive instant coverage on making the single premium payment, ensuring the financial security of your beneficiaries in case of your untimely demise.
• Single Premium Life Insurance policies offer several tax benefits, allowing you to potentially save on income tax.
• They are good tools for estate planning, as they provide a lump sum payout to your beneficiaries to cover financial obligations or estate taxes.
• As you do not need to make regular premium payments, there is no risk of the policy lapsing, which is the case with other policies when you miss or delay a payment.