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Single-premium life insurance policies offer the convenience of a one-time payment for long-term coverage, but they come with specific tax considerations that policyholders must understand. The tax benefits of these policies are governed by provisions in the Income Tax Act, of 1961, and some important changes in recent years could affect how the policy’s premiums and maturity benefits are taxed.
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One of the key benefits of life insurance, including single premium policies, is the tax benefit under Section 80C. You can claim a deduction of up to ₹1.5 lakh for premiums paid towards life insurance policies, including single premium plans. This applies to policies where the premium does not exceed certain limits based on the sum assured.
For policies issued after April 1, 2012, the premium should be no more than 10% of the sum assured to qualify for tax deductions under Section 80C. If it exceeds this threshold, the excess premium amount will not be eligible for deduction and may be subject to tax.
The allowable premium limit is 20% of the sum assured for policies issued before April 1, 2012.
This ensures that the tax relief is only available for life insurance policies within reasonable risk parameters, making it an attractive option for taxpayers seeking to reduce their taxable income.
Term Plans
A significant change on April 1, 2023, is the taxation of maturity proceeds from life insurance policies. If the total premium paid exceeds ₹5 lakh in any financial year, the maturity proceeds will be subject to tax. This applies to single premium and traditional life insurance policies (excluding ULIPs).
Under the amended tax laws, maturity proceeds from policies where the premium exceeds ₹5 lakh are no longer eligible for tax exemption under Section 10(10D). Instead, these proceeds are added to the policyholder’s income and taxed at the applicable rates. However, policies that meet the conditions—i.e., where the premium is ₹5 lakh or less—continue to enjoy the tax-free status on maturity proceeds.
One of the advantages of life insurance is that the death benefits are entirely tax-free under Section 10(10D) of the Income Tax Act. This remains unaffected by the changes introduced for maturity benefits. Therefore, in the unfortunate event of the policyholder’s death, the nominee will receive the death benefit without any tax liability, irrespective of the premium amount.
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If the maturity proceeds from a single premium policy exceed ₹1 lakh, the insurer is required to deduct Tax at Source (TDS) at a rate of 5%. This TDS is deducted from the taxable portion of the proceeds, which is determined based on the premium paid relative to the sum assured. It’s important to note that this TDS can be claimed back when filing the income tax return, potentially reducing the final tax burden.
Single premium life insurance policies offer a convenient and effective way to provide financial security for your loved ones. While they carry significant tax benefits on premiums paid under Section 80C, the tax treatment of maturity benefits has become more stringent for policies with high premiums. Policyholders must be mindful of the ₹5 lakh threshold for tax exemption on maturity proceeds, as exceeding this amount will result in taxable proceeds. However, the death benefits remain tax-free, making life insurance an effective tool for estate planning.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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