7 Tax Benefits of Loans Against Insurance Policies

The sudden requirement for money could arise any time; it could be a medical emergency, a business cash requirement or related to other household needs. But not all of us might have the cash ready for such situations and you might be looking for a loan. 

Now, if you are someone who has sensibly made some investments, such as in life insurance policies, mutual funds or fixed deposits, you actually have a loan source, ready for you. 

Not a lot of people are actually aware of the fact that when you take an insurance policy, you also have a loan eligibility that might come along with it. You can take out loans against the policy's cash value – this is when policyholders can meet urgent financial needs without having to liquidate the policy or disturb their long-term financial planning. As a matter of fact, loans against insurance policies even provide a range of tax advantages that can help reduce financial burdens.

 7 Tax benefits of loans against insurance that you should know about

If you are someone who was not aware that you could avail of loans against insurance policies, you probably do not know that there are tax benefits for you to reap as well. 

Here are 7 key tax benefits of taking out a loan against an insurance policy:

1. Your loan amount is tax free - One of the biggest tax benefits of loans against insurance policies is that the money you borrow is not considered taxable income. When you take a loan against the cash surrender value of your life insurance policy, the proceeds are tax-free, which means you don't have to worry about the funds being added to your annual income for tax purposes. In India, this tax-free feature applies to loans taken against life insurance policies from companies like LIC, SBI Life, and even several private insurance providers.
2. There is no TDS on the loan proceeds - Unlike with unsecured personal loans, , there is no TDS (Tax Deducted at Source) applicable when you take a loan against an insurance policy, which means that there no need to deal with tax deductions when making interest payments. This benefit ensures that you receive the full amount of the loan, without any reduction due to tax deductions.
3. No GST or service tax – Another one of the tax benefits of loans against policy is that there is no GST (Goods and Services Tax) or service tax on them. Technically, you are borrowing against your own policy, which is why it is treated differently from other types of loans like personal or business loans, where services are rendered and so, GST applies. Because there are no additional taxes levied on the loan transaction itself, this is a much more cost-effective option, in comparison to other loans.
4. No capital gains tax – In India, if you are selling any investments, such as stocks or mutual funds, unit linked insurance plans there could be a capital gains tax. Any amount under INR 1,25,000/- are exempt, but anything above could be subject to a tax amount. However, owing to the tax benefits of loans against insurance, there is no capital gain tax on accessing liquidity via a loan. The money you receive is not a withdrawal, rather a loan, and therefore it doesn’t fall under the purview of capital gains taxation.
5. Safety for Section 80C benefits - In India, premiums paid for life insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per annum. When you take a loan against your life insurance policy, there is no effect whatsoever on your ability to claim this deduction. So, you can avail a loan, and still enjoy the tax benefits on the premiums that you pay. 
6. Interest deduction on loans taken for investment or business - If you take a loan against life insurance policy and use the loan proceeds for business or investment purposes, you just might be eligible to claim tax deductions on the interest paid under Section 36(1)(iii) of the Income Tax Act, 1961. This section allows the deduction of interest paid on loans taken for business purposes, which can significantly reduce your tax liability. This is an especially good idea for entrepreneurs and business owners, who are looking for funds to expand their business or invest in property, for example.
7. No tax on policy surrender over repaid loans – Now, if at any time, you decide to surrender your life insurance policy and have repaid the entire loan amount, you can receive the full surrender value, without any tax implications. However, as per Indian regulations, you should have paid insurance premiums for at least 5 years. This rule remains applicable even if you had taken and repaid a loan against the policy. As long as you pay off your loan, there will be no implications on your policy. 

At Mera Kal, you can get a loan against a variety of insurance policies, with minimal paperwork and quick disbursal. If you too are looking for a loan, without having to worry about tax deductions or need to understand a little bit more about how all this works, get in touch with us today!