Life Insurance Payout May Not Always Qualify For Tax Exemption

Life insurance policies that are not term plans provide both maturity and death benefits, along with tax advantages under Section 80C and Section 10(10D) of the Income-tax Act, 1961. 

Says Rahul Charkha, partner, Economic Laws Practice: “The maturity proceeds from a life insurance policy are exempt from tax under Section 10(10D) if specific conditions are met.”

Rules Related To Premium

For policies issued on or after April 1, 2012, the exemption applies when the annual premium does not exceed 10 per cent of the sum assured, ensuring that the amount received upon maturity of the policy remains tax-free. 

Additionally, any bonus received under such policies is also exempt. 

Says Charkha: “Similarly, for policies issued between April 1, 2003, and March 31, 2012, the exemption applies if the annual premium does not exceed 20 per cent of the sum assured, with both the maturity amount and bonus being tax-free. Any amount received upon the death of an insured remains tax-free under Section 10(10D).”

Rules For Ulips

For unit-linked insurance plans (Ulips) issued after February 1, 2021, and where the annual premium paid exceeds Rs 2.5 lakh, then in such cases the maturity proceeds become taxable, says Suresh Surana, a Mumbai-based chartered accountant. 

Some Other Conditions Where Maturity Proceeds are Taxed

If non-Ulips are issued after this date and the annual premium paid exceeds Rs 5 lakh then in such cases the maturity proceeds become taxable.  

Says Surana: “Also, for policies issued after April 1, 2013, to persons with disabilities or severe illness, the premium value shall not exceed 15 per cent of the sum. assured, otherwise it will become taxable.” 

Charkha adda that proceeds from a keyman insurance policy, which is essentially life insurance policy taken by a business or on the life of a key employee, are not exempt under Section 10(10D). 

“Further, if the maturity proceeds are taxable, TDS at two per cent is deducted under Section 194DA on the amount of income if the payout exceeds Rs 1 lakh. If PAN is not provided, TDS at 20 per cent applies,” says Charkha. 

So, it is important to understand that death benefits always remain tax-free. However, maturity benefits may or may not be tax-free depending on certain conditions mentioned above.