Most people, especially if they’re new to life insurance plans, tend to assume the policy benefits receivable at the end of the policy term are free from taxation. While this may be true regarding death benefits of life insurance plans, there are a few exceptions. These mainly concern the conditions stated in the laws concerning life insurance tax benefits.
It’s important to know when the proceeds are tax-free and when they’re not. This can save you a lot of time, hassle, and money.
The Taxability of Life Insurance Maturity Amount
Let’s start with the most common tax exemptions – the death benefit and the maturity amount. When the policy nominee receives a death benefit, it is tax-exempt. However, there are situations where they are taxed on a portion of or the whole sum.
For example, if the insurance company holds the policyholder delays the payout and the amount, they will need to pay taxes on the interest generated during that holding period. Or if the benefit is paid to an estate or property, then the person inheriting the property must pay taxes.
You’ll be able to understand why these exceptions come into play when you take a closer look at the laws concerning life insurance policy deductions in income tax.
Life Insurance Deductions In Income Tax And Their Exceptions
- Section 80C
The premiums for life insurance plans purchased under any insurer approved by the Insurance Regulatory and Development Authority of India (IRDAI) are eligible for deductions under this section. If you have paid premiums to insure yourself or your family members, these premium payments make you eligible for a life insurance deduction in income tax.
For life insurance of people with disabilities and illnesses, as specified under sections 80U and 80DDB of the Income Tax Act, the annual premiums paid should not increase 15% of the sum assured.
For example, If you have paid premiums on a life insurance policy from Tata AIA life insurance, you will be allowed a maximum deduction of ₹1.5 lakhs each year.
- Section 10(10D)
Under Section 10(10D) of the Income Tax Act, the death benefits payable to the nominee of a late policyholder are tax-exempt. This also applies to the maturity benefits payable to the policyholder if they outlive the policy term. This is, however, subject to terms and conditions as follows.
- If any of the annual premium payments exceed 10% (for policies issued after 1 April 2012), of the sum, the maturity benefits will be tax-free.
- The same applies to policies issued before 1 April 2012, with premiums below 20% of the sum assured. Note that the assured sum will not include any bonus amounts or return premiums that exceed the assured sum.
TDS On Life Insurance Policy
According to the Income Tax Act, TDS (Tax Deducted at Source) applies to any life insurance proceeds received by the policyholder or nominee if they are not exempt under Section 10(10D). Additionally, any individuals who haven’t submitted their PAN credentials to their insurers will be subject to 20% TDS, wherever applicable, on any amount received.
Note that when you buy life insurance policies from foreign insurance companies may be subject to additional taxation.
Tax Liability Of Single Premium Insurance Policies
Regardless of the type of insurance policy, the same rules apply to the taxability of premiums when it comes to Section 80C of the Income Tax Act. The minimum and maximum sum assured limit of your single premium life insurance will be determined by your insurer, based on which the taxability of the life insurance matuity amount under Section 10(10D) will apply. The death benefit will, however, remain tax-free.
Buying a life insurance policy can benefit anyone looking to secure their family’s future financially. However, you must always examine the features and exclusions provided under the plan and the laws that apply to it, along with discussing all the terms and conditions with your insurer. This will give you the full picture and help you make better financial decisions concerning your future.