Understanding Income Tax Sections relevant to Life Insurance Selling (Applicable for Assessment Year 2013-14) During a video

conference held with Managers (DMKT) recently and various interactions with the Direct Sales Executives, it was felt that a synopsis of Income Tax Rules is required to be provided to sales force to help them get some idea about various income tax provisions relevant to selling life insurance. In this document, an attempt has been made to put the relevant provisions in simple way for the purpose of preliminary training to sales force and assisting them understand it. This training material is not valid and meant for any legal purpose. It is also clarified that for any interpretation or further/complete understanding, the relevant documents/circulars/instructions issued by the concerned authorities/Government of India will hold good and should be referred to.

In Income Tax parlance, a financial year is termed as Previous Year and the year in which its income tax returns should be submitted (i.e. next financial year) as Assessment Year. In this document, previous year means FY 2012-13 and Assessment Year as FY 2013-14. INCOME TAX CALCULATION: (I) In case of every individual other than Senior Citizens i.e. the individuals referred to in item II, and III below; Rates of Income-tax Nil 10 per cent, of the amount by which the total income exceeds Rs. 2,00,000/Rs. 30,000/- plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000/-. Rs. 1,30,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 10,00,000/-.

Income Level I. Where the total income does not exceed Rs. 2,00,000/2. Where the total income exceeds Rs. 2,00,000/- but does not exceed Rs. 5,00,000/3. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-. 4. Where the total income exceeds Rs. 10,00,000/-.

(II)

In the case of every individual, being a resident in India, who is of the age of sixty years or more but less than eighty years at any time during the previous yearRates of Income-tax Nil 10 per cent, of the amount by which the total income exceeds Rs. 2,50,000/-

Income Level I. Where the total income does not exceed Rs. 2,50,000/2. Where the total income exceeds Rs. 2,50,000/- but does not exceed Rs. 5,00,000/-

3. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-. 4. Where the total income exceeds Rs. 10,00,000/-.

Rs. 25,000/- plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000/-. Rs. 1,25,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 10,00,000/-.

(III)

In the case of every individual, being a resident in India, who is of the age of eighty years or more at any time during the previous year ,Rates of Income-tax Nil 20 per cent, of the amount by which the total income exceeds Rs. 5,00,000/Rs. 100,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 10,00,000/-.

Income Level I. Where the total income does not exceed Rs. 5,00,000/2. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/3. Where the total income exceeds Rs. 10,00,000/-.

(A)

Education Cess: A surcharge called as 'Education Cess' shall be levied at the rate of 2 percent on the amount of Income Tax as computed above. Secondary and Higher Education Cess: An additional surcharge, called the "Secondary and Higher Education Cess on incometax" at the rate of 1 percent of income-tax (not including the "Education Cess on Income-tax") in all cases shall be levied. Education Cess and Secondary and Higher Education Cess are payable by both resident and non-resident assesses.

(B)

Relevant Sections of Income Tax Act, 1961 1. Section 80 C: Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. Under this section, deduction from income is allowed for the amount paid or deposited in the previous year, upto Rs. 1,00,000/- in respect of the following: A. The sums paid or deposited in the previous year by the assessee (i) to effect or to keep in force an insurance on the life of persons specified; (ii) to effect or to keep in force a contract for a deferred annuity, on the life of persons specified:

The sub-section (3A) has been inserted after sub-section (3) of section 80C by the Finance Act, 2012, w.e.f. 1-4-2013. The interpretation of this section is that quantum of premium allowed for deduction will not be more than 10% of the minimum capital sum assured. Examples: 1. Jeevan Anand Plan (T-149), Term-15 years, Age 32 years, Sum Assured Rs. 10 Lacs, Yearly premium Rs. 77,262/-. Since Yearly premium is less than 10% of SA, deduction is allowed for the entire amount of Rs. 77,262/- within the overall limit of Rs. 1 Lac. 2. Jeevan Vaibhav plan (T-809), Term-10 years, Age 18 years, Sum Assured Rs. 2 Lacs, Single Premium Rs. 95,440/-. 10% of SA is Rs. 20,000/- while SP is Rs. 95,440/- hence deduction allowed for Rs. 20,000/- within the overall limit of Rs. 1 lac. B. There are some other financial instruments also available for deduction under this section.

Marketing Opportunity: LICs almost all plans including pension plans (but excluding health plans and specific plans for physically handicapped dependent which are covered under other Sections) are eligible for deduction under this section. However, the eligible amount will be a maximum of 10% of the Sum Assured within overall limit of Rs. 1,00,000/-. 2. Section 80 D: Deduction in respect of health insurance premia. Deduction allowed for any sum, payment of which is made by any mode [other than cash] in the previous year. The maximum deduction allowed will be Rs. 15,000/- for amount paid towards insurance on the health of the assessee or his family (or for preventive health check-up). If any person being covered is a senior citizen (i.e. aged 65 years or above), the deductible amount will be increased to Rs. 20,000/-. In addition, further maximum deduction of Rs. 15,000/- will be available for amount paid towards insurance on the health of the parent(s) of the assessee (or for preventive health check-up). If any person being covered is a senior citizen (i.e. aged 65 years or above), the deductible amount will be increased to Rs. 20,000/-. However, the maximum allowable deduction on account of preventive health check-up will be Rs. 5,000/- only. The payment for preventive health check-up may be made by cash or other modes but other payments have to be made through a mode other than Cash.

Such Health insurance shall be in accordance with a scheme made in this behalf by LIC / GIC / Central Government. Marketing Opportunity: LICs Jeevan Arogya and Health Protection Plus Plan (T-902) premiums are eligible for deduction under this section. The detailed chart is given below. On whose Life Health Insurance premium is taken Amount eligible for deduction Additional Deduction if senior Citizen covered Total PI + Spouse & Dependent Children (Rs.) 15,000 5,000 20,000 Additional Deduction for Parents of the tax payer whether dependent or not (Rs.) 15,000 5,000 20,000 Total

(Rs.) 30,000 10,000 40,000

If an Individual takes Health Insurance Policy on his life/Spouse/Dependent children and also includes the Senior Citizen Parents for the cover, he is eligible for an amount of Rs. 35,000/- for deduction under Sec. 80 (D). If the Individual himself is a Senior Citizen and includes his parents, he is eligible for an exemption of Rs. 40,000/-. 3. Section 80 DD: Deduction in respect of maintenance including medical treatment of a dependant who is a person with disability. Where an assessee has, during the previous year, (a) incurred any expenditure for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability; or (b) paid or deposited any amount under a scheme framed in this behalf by the Life Insurance Corporation or any other insurer for the maintenance of a dependant, being a person with disability, the assessee shall be allowed a deduction of a sum of Rs. 50,000/- from his gross total income in respect of the previous year: Provided that where such dependant is a person with severe disability, the deductible amount will be increased to Rs. 1,00,000/-. The deduction shall be allowed only if the following conditions are fulfilled, namely:

(a) the scheme referred to provides for payment of annuity or lump sum amount for the benefit of a dependant, being a person with disability, in the event of the death of the individual in whose name subscription to the scheme has been made; (b) the assessee nominates either the dependant, being a person with disability, or any other person or a trust to receive the payment on his behalf, for the benefit of the dependant, being a person with disability. "Dependant" means (i) in the case of an individual, the spouse, children, parents, brothers and sisters of the individual or any of them; (ii) in the case of a Hindu undivided family, a member of the Hindu undivided family, dependant wholly or mainly on such individual or Hindu undivided family for his support and maintenance, and who has not claimed any deduction under section 80U in computing his total income for the assessment year relating to the previous year; "Person with severe disability" means (i) a person with 80% or more of one or more disabilities, as specified; or (ii) a person with severe disability as referred to in the specified Act. Marketing Opportunity: Premiums under LICs Jeevan Aadhar (T-114) are covered u/s 80 DD. Under this plan, LIC provides Guaranteed Additions at the rate of Rs. 100 per thousand which is quite high as compared to other plans. AMOUNTS NOT INCLUDED IN INCOME: 4. Section 10 (10 A): Any payment in commutation of pension received from an approved fund set up by the Life Insurance Corporation of India on or after the 1st August, 1996 under a pension scheme to which contribution is made by any person for the purpose of receiving pension from such fund. Marketing Opportunity: Commutation amount under pension plans is exempted from Income Tax. Though, as at now, there is no deferred annuity plan available for sale, however, policyholders getting their deferred annuity policies vested in near future, may be contacted for cross-selling other insurance products from the commutation amount.

5. Section 10 (10 D): Incomes not included in total income (i.e. amount not taxable). Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than (a) any sum received in respect of policies taken on the life of physically handicapped dependent where such dependent predeceases the individual hence income is taxable u/s 80 DD); or (b) any sum received under a Keyman insurance policy; or (c) any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured: Provided that these provisions shall not apply to any sum received on the death of a person (i.e. Death Claim amount is fully exempted from Income Tax). Interpretation: (a) The maturity amount including Bonus received will NOT be taxable if premium payable in any of the year of policy is less than 10% of the minimum capital sum assured. (b) The income i.e. the maturity amount received over and above the amount of premium paid by assessee will be taxable if premium payable in any of the year of policy is more than 10% of the minimum capital sum assured. In the example no. 2 given under Section 80C on page no. 3 of this document, assuming the maturity amount of Rs. 2.20 Lacs (i.e. including Loyalty Additions), the amount of Rs. 1,24,560 (i.e. amount received over and above the premium paid) will be taxable in the year of maturity and not the full maturity amount. Marketing Opportunity: LICs almost all plans (but excluding pension under pension plans and specific plans for physically handicapped dependent) are eligible for exemption from Income Tax provided annual premiums payable in any year does not exceed 10% of the Sum Assured. Where premiums payable exceed 10% of the Minimum Capital Sum Assured, there also premium amount upto 10% is eligible for exemption.

UNDERSTANDING TAX REGIMES: All financial instruments go through three stages i.e. Investment, Earning and Withdrawal. The tax rules are different for these stages of various products. There are six combinations of these stages:

1. 2. 3. 4. 5. 6.

EEE ETE TEE EET TET TTE

Exempt Exempt Exempt Exempt Tax Exempt Tax Exempt Exempt Exempt Exempt Tax Tax Exempt Tax Tax Tax Exempt

The regime of a product has impact on the net yield of a financial product. Marketing Opportunity: Not many products are available in the market under EEE regime. However, LICs most plans are covered under EEE regime where tax exemption on Investment is available u/s 80C, tax exemption on earned bonuses/Loyalty Additions u/s 10 (10D) and tax exemption on maturity/withdrawal u/s 10 (10D). The conditions for availing deductions / exemptions have been elaborated above in this document. Disclaimer: This training material is not valid for any legal purpose. For any interpretation/further/complete understanding, the relevant instructions/document issued by the Government of India/relevant Authority will hold good and should be referred to.

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