Income tax deductions can be reversed if you do this with your life insurance policy

Income taxpayers can benefit by investing in life insurance policies and applying deductions under Section 80C, yet all these benefits can get reversed if they don’t meet certain conditions.

Section 80C of the income tax Act 1961 allows taxpayers to claim a deduction up to Rs 1.5 lakh in respect of the premium paid for the life insurance policy. However, if the taxpayer terminates the policy due to the non-payment of the premium and does not revive the policy for two years for single-premium policies, in that case, no deduction under 80C shall be allowed, said Yeeshu Sehgal, Head of Tax Markets, AKM Global, a tax and consulting firm while talking to CNBC-TV18.com.

Additionally, the amount of the deductions claimed earlier by the taxpayer will be considered income in the hands of the taxpayer and this effectively means earlier deductions shall be reversed. On top of that, any benefit amount received from a life insurance scheme discontinued before the completion of two years will also be taxable as per deduction under 80C guidelines, Sehgal told CNBC-TV18.com.

This happens generally when taxpayers blindly invest in insurance-cum-investment products to save tax at the last moment in a financial year. Later, they stop the premiums thinking that the purpose is served. However, it’s important to understand that traditional insurance policies often require a very long-term investment commitment and taxpayers can hence incur heavy losses if they surrender them during the initial years.

In cases, where the policy is discontinued after one year, the insurer will deduct the full amount of the premium. In cases where taxpayers surrender policies after the second and third year, then only a part of the total premium will be paid.

Individuals who choose the old tax slab (that offer higher rates but applicable exemptions) for income tax return (ITR) filing invest in insurance schemes for tax saving purpose. In cases where individuals don't have any investments should definitely go for a new tax slab, experts opine.