Section 80C, the ₹5 Lakh Trap and a Cash Premium for a Nephew
Meera Joshi, 50, paid the following premiums in the financial year 2024-25, all by cheque from her own savings account: a 10-year endowment plan with a sum assured of ₹25 lakh and an annual premium of ₹3,00,000, issued in June 2023; a pure term plan with a sum assured of ₹1 crore and an annual premium of ₹45,000, issued in 2019; and a ULIP with a sum assured of ₹30 lakh and an annual premium of ₹3,00,000, issued in July 2024. She now wants to pay ₹1,20,000 in cash to her agent to cover the first premium on a policy on her 11-year-old nephew's life. Her chartered accountant has told her that all maturity proceeds are tax-free 'because life insurance is always exempt', and she expects a ₹1.5 lakh Section 80C deduction covering all four payments. The agent says cash is fine because the amount is below ₹2 lakh.
1. Which of these premiums qualify for the Section 80C deduction, and how much can she actually claim?
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Premium must come from her own eligible relationship and by a non-cash mode. Section 80C covers premiums for a policy on her own life, her spouse's life or her child's life. A policy on a nephew's life does not qualify, and the same payment is proposed in cash, which is not an accepted mode for the deduction. That payment is outside 80C on two independent grounds.
The 10% of sum assured cap. For policies issued on or after 1 April 2012, the qualifying premium per policy is capped at 10% of the sum assured:
- Endowment: 10% of ₹25 lakh = ₹2,50,000 (premium paid ₹3,00,000, so only ₹2,50,000 qualifies).
- Term plan: 10% of ₹1 crore = ₹10,00,000; the full ₹45,000 qualifies.
- ULIP: 10% of ₹30 lakh = ₹3,00,000; the full ₹3,00,000 qualifies.
Qualifying total is therefore ₹2,50,000 + ₹45,000 + ₹3,00,000 = ₹5,95,000, but the Section 80C ceiling is ₹1,50,000 overall, and she is already at that ceiling many times over. She should spread the claim optimally but cannot exceed ₹1,50,000.
Regime check. If she opts for the default new regime under Section 115BAC, Chapter VI-A deductions including 80C are not available at all. Her CA should confirm the regime before she plans around it.
2. Will the maturity proceeds of the three policies be exempt under Section 10(10D)?
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The CA's statement is wrong for two of the three policies, for two different reasons.
Endowment (issued June 2023). Section 10(10D) requires, for policies issued on or after 1 April 2012, that the annual premium not exceed 10% of the sum assured. Here ₹3,00,000 against a sum assured of ₹25 lakh is 12%, above the ₹2,50,000 limit, so the maturity proceeds are taxable as income from other sources and 2% TDS applies under Section 194DA on the income component once it exceeds ₹1 lakh. Separately, for policies issued on or after 1 April 2023, exemption fails where aggregate annual premium across such policies exceeds ₹5 lakh; here the aggregate is ₹3,00,000 (the 2019 term plan is outside that count), so that threshold is not breached. The decisive test is the 10% of sum assured condition, and it fails.
ULIP (issued July 2024). A ULIP issued on or after 1 February 2021 with an annual premium above ₹2.5 lakh is outside Section 10(10D). The gain on maturity is taxed as capital gains, not as exempt income, at the rates applicable to such units.
Term plan. It has no maturity value; the death benefit is exempt under the proviso to Section 10(10D) even where the premium exceeds the limits. She should be told that only a correctly structured policy earns the exemption, and that a wrong structure is discovered at maturity, not at sale.
3. How should the agent handle the ₹1.2 lakh cash payment and what compliance issues arise?
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Refuse the cash. Under the IRDAI AML/CFT framework, insurers must not accept cash premium beyond the prescribed threshold (₹50,000 is the working limit) and must apply enhanced due diligence and source-of-funds checks where cash is involved. Accepting ₹1.2 lakh in cash at the agent's office, and collecting it personally, breaches the AML guidelines, the insurer's premium-collection rules and the agent's code of conduct. The ₹2 lakh reference is the income-tax restriction on cash transactions under Section 269ST, which is a different and irrelevant rule here; compliance with one does not cure breach of the other.
Third-party payment. The premium would be paid by an aunt for a policy on her nephew. IRDAI's third-party premium rules permit payment only by defined close relatives, with a signed declaration and KYC of the payer, and the insurer's board-approved policy governs the list. The aunt-nephew relationship and the insurable interest need separate verification.
AML obligations. Verify the source of funds, complete KYC of both payer and proposer, and if the pattern remains suspicious after explanation, file a suspicious transaction report with FIU-IND within the prescribed seven-day window. Keep a written record of the advice given.
Right course: ask her to pay by cheque, UPI or bank transfer from her own account into the insurer's account, and let the proposal be written on the correct life with the correct relationship disclosed.