LIC policies offer two powerful tax benefits under the Income Tax Act, 1961:
- Section 80C — Deduction on the premium paid (up to ₹1,50,000 per year).
- Section 10(10D) — Tax-free maturity and death benefits.
This guide explains both in plain English, with examples.
1. Section 80C — Deduction on Premium Paid
Under Section 80C, the premium you pay towards an LIC policy is eligible for deduction from your gross total income, up to a maximum of ₹1,50,000 per financial year. This is part of the overall 80C limit, which also includes:
- EPF / VPF / PPF contributions
- ELSS mutual fund investments
- Home loan principal repayment
- Tuition fees for children's education
- 5-year tax-saver FDs
- NSC, KVP, SSY
Conditions:
- The policy must be in your name, your spouse's name, or your children's name.
- The premium must be paid via banking channels (no cash) for the deduction to be allowed.
- The deduction is available even if you opt for the new tax regime — but only for premiums on policies that qualify under the old regime's 80C. Under the new regime, 80C is replaced by 80CCC, but most LIC premiums qualify for 80CCC up to ₹1,50,000.
Example
Ramesh, age 35, pays ₹80,000/year as LIC premium. He also invests ₹50,000 in ELSS and ₹20,000 in PPF. His total 80C investments = ₹1,50,000. He can claim the full ₹1,50,000 as deduction, reducing his taxable income by that amount.
If Ramesh is in the 30% tax bracket, he saves ₹45,000 in tax (including cess) every year.
2. Section 10(10D) — Tax-Free Maturity and Death Benefits
Under Section 10(10D), the entire maturity amount (Sum Assured + bonus + FAB) and death benefit received from an LIC policy is completely tax-free in the hands of the recipient, subject to the following conditions:
- For policies issued on or after 1 April 2012: the annual premium must not exceed 10% of the Sum Assured.
- For policies issued between 1 April 2003 and 31 March 2012: the annual premium must not exceed 20% of the Sum Assured.
- For policies issued on or after 1 April 2023, with annual premium above ₹5 lakh: the Sum Assured must be at least 10× the annual premium.
Death benefit is always tax-free under Section 10(10D), regardless of the premium-to-Sum-Assured ratio, for any LIC policy.
Example
Suresh buys LIC New Jeevan Anand (715) with Sum Assured ₹20,00,000 and yearly premium ₹1,60,000. Premium/SA = 8%, which is below 10%. So the maturity proceeds (₹42,00,000 after 20 years, including bonus) will be fully tax-free.
Bonus + FAB Tax Treatment
The accrued simple reversionary bonus and FAB are part of the maturity/death benefit, and are therefore tax-free under 10(10D) along with the Sum Assured.
Survival Benefit (Money-Back Payouts) Tax Treatment
Periodic money-back payouts (under plans like 720 and 721) are also tax-free under 10(10D), provided the policy meets the premium-to-SA ratio.
Surrender Value Tax Treatment
If you surrender the policy:
- After 2 years (or as per the policy terms): Surrender value is tax-free under 10(10D) (if the policy qualifies).
- Before that: The gains (if any) are added to your income and taxed at your slab rate.
What Happens to 80C Deduction if You Stop Paying Premium?
If your policy lapses or becomes paid-up, the 80C deduction you claimed in earlier years is not reversed. However, you cannot claim further deductions for that policy.
What About GST on Premium?
LIC premiums attract 18% GST on the base premium. This GST is not eligible for any separate tax deduction (it is part of the total premium, and the total is eligible under 80C).
LIC vs Other Tax-Saving Options
| Investment | Lock-in | Tax on Maturity | Returns (Indicative) |
|---|---|---|---|
| LIC Endowment (e.g., Plan 715) | 15-35 years | Tax-free under 10(10D) | 3.5-4.5% |
| PPF | 15 years | Tax-free (EEE) | 7.1% (govt-set) |
| 3 years | LTCG over ₹1 lakh @ 10% | 10-12% (long-term) | |
| 5-year Tax-Saver FD | 5 years | Taxable as per slab | 6.5-7.5% |
| NPS (Tier 1) | Till 60 | Partially tax-free | 8-10% (market-linked) |
Conclusion
LIC plans are one of the few investments that offer EEE (Exempt-Exempt-Exempt) status — premium deduction under 80C, tax-free accumulation, and tax-free maturity under 10(10D). While the returns are modest, the tax efficiency and peace of mind make them a useful part of a diversified portfolio.
Use our LIC Premium Calculator to plan your policy and read more about LIC tax planning on our blog.