What Are 80C and 10(10D) in Income Tax?

In case you own a life insurance policy, it is a must that you are aware of the fact that the Income Tax Act has defined Sections 80C and 10(10D). Both provide you some tax benefits; however, the latter allows benefits only partially. Here is an interaction-friendly and quick guide of their working mechanisms.

Section 80C: A Tax Deduction for the Money You Pay

The first section 80C is applicable to a maximum yearly amount of ₹1.5 lakhs where the tax payer can claim a deduction if he/she pays for life insurance premiums. The implication of such condition is that with given income you are taxed on the reduced amount (in our case the premium paid), hence you get a tax reduction.

 Section 10(10D): A Tax-free Maturity or Death Claims

The money that you receive if your policy matures or in a case where the nominee is given death benefits are tax-free (sum assured, bonus, etc.) under Section 10(10D). Hence no tax is levied on the gains.

 How Do These Work?

By 80C you absorb each year the premium money into your tax deduction, thus saving on taxes. The money you get in case the policy is terminated or the unfortunate event occurs is free from taxation under provision 10(10D). So basically by 80C you pay less tax upfront and with 10(10D) you pay no tax later on maturity or claim amounts.

Example

Mr. Sharma spends ₹50,000 yearly for a life insurance policy as a premium. He uses the amount under Section 80C and saves the tax. The policy then matures after 5 years and it owes ₹3 lakh to Mr. Sharma. By reason of Section 10(10D) this amount of ₹3 lakh is fully free from taxes.

 Have a quick look at the important points!

80C: Up to ₹1.5 lakh deducted if the money is used for payment of premiums.
10(10D): No tax on the money received either on maturity or death.
To be eligible for the exemption, the premium should not be more than 10% of the sum assured.
The provisions are equally applicable to any life insurance and ULIPs (subject to certain conditions).
Enables a reduction in tax both during the policy period as well as on payout.