Should you buy insurance policy to be eligible for Sec.

80C?

QUESTION: I am herewith enclosing an extract from

Economic Times dated January 10, 2011, which in its
Taxation Column has an article titled “This year don't buy
insurance to save tax”. I would like to know whether the
advice given is correct?

ANSWER: Any subscription to any insurance policy before

March 31, 2011, should be eligible for the benefit of
deduction under Sec. 80C. Even under the present law,
single premium policies or for that matter, a policy which
overruns two years would not get the benefit of deduction in
view of the limitation under Sec. 80C(5) which provides that
termination of a contract within two years would lose the
benefit of deduction already allowed. Once the policy is
covered under Sec. 80C, subscriptions to such policy under
Sec. 80C or similar provisions under the new law cannot
possibly lose the benefit of deduction. The article does
highlight the omission in the Bill to make the new condition
applicable for policies issued from the date on which the Bill
becomes law.

It may be pointed out that Sec. 10(10D) provides for tax

liability for proceeds of insurance policies issued on or after
April 1, 2003, if the premium of such policies is less than 20
per cent of the capital sum assured (policies usually for five
years). The date, April 1, 2003, was chosen because 20 per
cent limit was inserted for tax rebate under Sec. 88(2A) at a
time when tax rebate was allowed. When the relief was
reverted to Sec. 80C, there was no such limit but
corresponding amendment to Sec. 10(10D) was not made.
At any rate, the amendment did not affect earlier policies
because the law is against vested rights being divested. A
similar clarification is necessary in the Bill.
It is to be noted that no tax can be levied on the proceeds of
policies on the death of the insured both under Sec. 10(10D)
and Clause 46 of the Sixth Schedule of Direct Taxes Code
Bill, 2010. But the Bill takes no notice of exemption under
Sec. 10(10D) either on policies issued before April 1, 2003
or after. This is understandable because the original drafting
was done under Exempt, Exempt, Tax (EET) Scheme. Once
this is abandoned as publicly acknowledged in the revised
discussion paper, this clause should have been amended.
The need for such an amendment should not be missed
before the Bill becomes law.

At any rate, it is for the insurance lobby to ensure a law

consistent with the principles of law against withdrawal of
vested right. If necessary, the benefit of law may be limited
to long-term policy of ten years (against the proposed 20
years). Where relief is not granted even for shorter policies,
there is no logic in taxing the proceeds of the policy, where
no deduction had been allowed. This should be put across to
our law-makers before the Bill becomes law.

I do not think that any one need to be inhibited from the

title of the article referred by the reader, though it does
highlight the anomalies in the Bill. Probably the title has
misunderstood the article, which highlights a stiffer
treatment for insurance policies proposed in the Code in
prescribing a minimum coverage of risk of larger period of
about 20 years.

Incidentally, the main theme of the article is based on the

view that “for investors who are comfortable taking risks,
equity-linked savings schemes are a better way to save tax”.

Equity-linked savings schemes are different products from

the life insurance solely meant to cover risk to life.
Insurance for a minimum amount necessary for the family
would appear to be the first priority. Beyond this minimum
limit, insurance may or may not be combined with equity
linked schemes or for that matter pension schemes
recognised in the same article according to individual
perceptions of the investor.