1) Section 80C deduction is available only in the year of payment. In other words, one can’t claim deduction across policy term similar to regular premium insurance policy. (Max limit under 80C is Rs. 1.5 lakh which includes insurance premium among other investment/saving avenues)
2) Where premium is more than 10%* of sum assured,
a) excess of premium over 10% of sum assured is ineligible as deduction under section 80C and
b) gain on surrender or maturity of such policy is subject to Capital gain tax** (No tax on proceeds received on account of death of policy holder)
3) If we surrender policy within 2 years of purchase, tax deductions previously availed are taxable as income in the year of surrender
* in respect of insurance policies issued from April 1, 2003 to March 31, 2012, it is 20% of sum assured
**One will receive proceeds from insurance company after deduction of TDS at 5%. While calculating Capital gain tax, cost of acquisition will be amount of premium paid in excess of 10% (or 20% as the case may be) of sum assured.
The taxability of the sum received under life insurance policies [if not exempt under section 10(10D)] has always been a disputed matter, whether it would be taxable under the head capital gains or other sources. Please note that w.e.f. April 1, 2023, it is taxable under “Income from other sources” as per Section 56(XIII)