Tax on Guaranteed Income Plan

Guaranteed Income Plans are a form of savings or insurance plan that guarantees an annual income for a set length of time. It’s a non-linked, non-participating endowment plan in which the policyholder pays the premium until maturity and receives a regular dividend as well as insurance coverage.

There are four different types of classifications:

• Premium paid for 5 years
• Premium paid for 7 years
• Premium paid for 10 years
• Premium paid for 12 years

In the event of a five-year premium, the policyholder will pay for five years, after which, based on the insurance coverage amount and the term chosen (5/10), he will receive an annual payout for five years.

In addition to his normal salary, he will receive an insurance benefit, which will provide a lump sum payment to the nominee in the event of a mishap. Fortunately, if the policyholder lives long enough, the entire corpus will be paid out at maturity.

Similarly, annual payouts will be provided for 8 years after the conclusion of the premium payment term for the 7/12 years premium coverage. The annual payout for a ten-year premium policy will be made for ten years following the conclusion of the premium payment term.

Having discussed the policy features, now let’s get to the taxability part of ii.

Tax implications of the Guaranteed Income Plan

The first portion of a Guaranteed Income Plan is the investment part, which includes the payment of premiums, and the second part is the maturity amount.

Deduction under section 80C

Section 80C of the Internal Revenue Code allows for the deduction of premiums paid for life insurance. Because the guaranteed income plan includes life insurance, the premium paid for it is deductible under this clause.

However, there is a limit to how much you can deduct. It offers a list of investments and expenses that fall under section 80C‘s purview. And the total amount that can be deducted is limited to Rs.150,000.

If you choose a 5-year premium plan with a 10-year term, for example, you must pay the premium for 5 years. After the first five years, you will begin receiving annual income based on the maturity amount from the sixth to the fifteenth year.

So, if you get insurance in 2018, you’ll have to pay premiums until 2023, and you’ll start collecting annual payments from 2024 to 2033. If anything happens during this time that leaves your family alone, your nominee will receive the entire corpus. If nothing unexpected happens, you will receive the full maturity amount at the end of 2033.

Deduction under section 10(10D)

The Income Tax Act allows some incomes to be excluded from taxation, one of which being the sum paid as maturity from a life insurance policy. However, it is subject to the following restrictions: – If the annual premium paid for an insurance policy purchased between April 2003 and March 2012 is more than 20% of the sum insured, the amount received on maturity will be included in the total and will not be eligible for exemption.

Similarly, if the annual premium paid is more than 10% of the sum insured for an insurance policy purchased on or after April 2012, the amount collected at maturity will be included in the total and will not be eligible for exemption.

For an insurance policy taken on or after April 2013, who is:

• A person with a disability or a person with severe disability as referred to in section 80U; or
• Suffering from disease or ailment as specified in the rules made under section 80DDB,

The amount received on maturity will be included in the total and will not be eligible for an exemption if the annual premium paid is more than 15% of the sum assured.

Deduction for maturity and premium payment is permitted when the premium is paid in line with the aforementioned circumstances.