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Life Insurance plans are not only useful in growing wealth in the long run and securing your family’s financial future, but also in saving taxes. The Income Tax Act of 1961 allows you to save on your yearly taxes through various sections. Through these sections, you can save on your premiums and benefit payouts. Let us see how the tax on insurance payout works.
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Life Insurance Payouts are taxable under certain conditions and tax-exempted under a few other conditions. Let’s understand these conditions in detail.
Here are a few conditions of life insurance payout being completely tax-exempted:
For life insurance policies issued after 1 April 2012, if premium paid does not exceed 10% of sum assured, any amount received upon the death of the insured, or on the maturity or surrender of the policy, is fully exempt from tax. This includes any bonuses received.
For policies issued before 1 April 2012, the tax-exemption threshold is slightly higher. If premium paid does not exceed 20% of sum assured, then the maturity proceeds and any bonuses received are fully exempt from income tax.
For policies issued after 1 April 2013 that cover individuals with disabilities or specific diseases (as specified under Sections 80U and 80DDB), the premium must not exceed 15% of sum assured for the maturity proceeds to be tax-free.
Here are some of the situations in which life insurance payouts are taxable:
If a life or term insurance policy was issued between 1 April 2003 and 31 March 2012, and the premium paid exceeds 20% of sum assured, the maturity proceeds will be taxable.
For policies issued after 1 April 2012, if premium exceeds 10% of sum assured, the maturity proceeds will be taxable.
For policies issued after 1 April 2013 on the life of a person with a disability or a specified disease, if premium exceeds 15% of sum assured, the maturity proceeds will be taxable.
*Note: Regardless of the premium percentage, if the life assured unfortunately dies, the maturity proceeds received by the nominees are tax-free. This means that even if the premium paid in any year exceeds the prescribed limits, the death benefit will not be taxed in the hands of the nominees.
Term Plans
As per the Union Budget 2023, the payout from insurance policies (apart from ULIP plans) issued on or after the 1st of April, 2023 will be taxable if the aggregate annual premium is more than Rs. 5 Lacs. Therefore the answer to ‘Is life insurance taxable?’ is yes. The taxation on life insurance payout will be exempted in case of the death of the life assured. If you already have a life insurance plan with premiums exceeding Rs. 5 Lacs in a year, then you need not worry, as the new tax law is only applicable to policies purchased on or after April 1, 2023.
The new taxation on life insurance will be applicable only on the payout received during the maturity of the policy. In cases of death benefit claims, the amount will be exempted from taxes under section 10(10D) of the Income Tax Act of 1961.
There are tax exemptions on life insurance maturity amount received under Section 10(10D) in case of the following situations:
For life insurance policies issued after April 1, 2012, if premium paid does not exceed 10% of sum assured, the amount received on the death of the insured, or on the maturity or surrender of the policy, is fully exempt from tax under Section 10(10D). This includes any bonuses received.
For policies issued before April 1, 2012, if premium paid does not exceed 20% of sum assured, the maturity amount and any bonuses received are fully exempt from income tax under Section 10(10D).
For policies taken after April 1, 2013, covering a person with a disability or a disease specified under Sections 80U and 80DDB, the maturity amount is tax-free if premium paid does not exceed 15% of sum assured.
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As per the Union Budget 2024 announced by Nirmala Sitharaman, Minister of Finance of India, it has been announced that your life insurance payout will increase due to a reduction in the Tax Deducted at Source (TDS) rate to 2%. The explanatory memorandum of Budget 2024 states that TDS under section 194DA of the Act will be reduced from 5% to 2%. This means that less tax will be deducted from your life insurance payout, resulting in a higher amount received by the policyholder or nominee.
Let us take a look at the taxation of life insurance in India:
Premiums Paid: The premiums paid for life insurance policies are eligible for tax benefits under Section 80C of the Income Tax Act. The maximum deduction allowed is up to ₹1.5 lakh per financial year. This deduction can be claimed by the policyholder for premiums paid on their own life, spouse's life, or children's life.
Maturity Proceeds: The maturity amount received from a life insurance policy is generally tax-exempt under Section 10(10D) of the Income Tax Act. This means that the entire amount received at the end of the policy term, including the sum assured and bonuses, is exempt from income tax on life insurance policy.
Death Benefit: The death benefit received by the nominee or beneficiary upon the demise of the insured person is also tax-exempt under Section 10(10D) of the Income Tax Act. The entire amount received as the death benefit is not subject to income tax on life insurance policy, providing significant financial relief to the family or dependents.
Surrender Value: If a policyholder surrenders their life insurance policy before the completion of the policy term, any surrender value received may have tax implications. The surrender value is the amount payable to the policyholder upon early termination of the policy. The surrender value is taxed as per the provisions of the Income Tax Act.
Riders and Additional Benefits: Riders attached to a life insurance policy, such as accidental death benefit or critical illness cover, may have separate tax implications. The life insurance taxation of riders depends on the specific provisions of the Income Tax Act and applicable regulations.
It is important to note that tax laws and regulations are subject to change, and individuals are advised to consult a tax professional or financial advisor for accurate and up-to-date information regarding the taxation on life insurance policies in India.
The Government of India offers relief for income tax on life insurance policy to help policyholders get the most benefits. Although there are various sections offering different tax benefits in life insurance, the 3 main sections that are the most important are listed below.
Section 80C
Any Indian resident or non-resident individual can claim a deduction for the premium amount paid for life insurance u/s 80C up to Rs. 1.50 lakhs annually. This type of deduction is available with other products such as NSC, fixed deposits, PPF, ELSS, tuition fees paid, provident fund contribution, home loan repayment, etc.
Policyholders can claim a deduction on income tax on life insurance policy under section 80C for life insurance premiums up to 10 percent of the sum assured amount. And, 15% of the sum assured is exempted and capped at Rs. 1.5 Lakhs annually for some individuals who are categorized as handicapped or suffering from any kind of critical illness.
Section 80D
Under section 80D of the Income Tax Act of 1961, any individual or HUF can claim a deduction of Rs. 25, 000 on an individual, spouse, or child’s health insurance plan. You can also claim a deduction of Rs. 50, 000 on a senior citizen’s health insurance if you have purchased life insurance for your dependent parents or dependent’s in-laws.
Policyholders can claim under this section, by including health riders like critical illness benefit riders, hospicare riders, and surgical care riders in your base life insurance policy.
Section 10(10D)
You can get tax exemption on the benefit payout received from life insurance policies as per the new Budget 2023-2024.
*Note: Tax benefits are subject to changes in tax laws
Let us take a detailed look at the taxation on life insurance policy payouts in the year 2024.
You could wonder how payouts from single-premium life insurance policies are taxed. Let's understand this with the help of an example.
Naveen bought a life insurance policy with a maturity value of Rs. 1 Lakh by paying a single premium of Rs. 40,000 on September 20, 2013. Calculating 10% of the premium, i.e. Rs 10,000. Since the premium of Rs. 40,000 exceeds 10% of the sum assured, the maturity proceeds from the insurance policy are taxable and do not qualify for exemption under Section 10(10D) of the Income Tax Act.
However, upon surrendering the life insurance policy on maturity on September 20, 2019, since the maturity amount exceeds Rs. 1 lakh, the insurer is required to deduct tax at source (TDS) on the maturity proceeds. TDS is levied at 5% on the income component of the payment, calculated on the net maturity proceeds of Rs. 60,000 (Rs. 1,00,000 - Rs. 40,000).
Therefore, the TDS amount would be 5% of Rs. 60,000, totaling Rs. 3,000. Naveen would receive a net amount of Rs. 57,000 (Rs. 60,000 - Rs. 3,000). When filing his income tax return, Naveen should declare the net maturity proceeds as 'income from other sources' and can claim credit for the TDS of Rs. 3,000 against his tax liability.
If you were planning on purchasing a life insurance plan to secure your family, with aggregate premiums of more than Rs. 5 Lacs, you can still buy life insurance plans before the 31st of March, 2023. The income from insurance policies bought before the 31st will be following the old tax laws.
Life insurance is one of the easiest ways to secure your family and build a corpus, but it can also be helpful in saving taxes. The taxation on life insurance is designed to benefit the policyholders. Thus, you should always keep up to date about the current tax laws before making any financial decisions or investments. You can consult a financial advisor to make sure that you understand all the details of life insurance taxation before purchasing it.
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+Rs. 487/month (Rs.16/day) is starting price for a 1 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
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+Rs. 820/month is starting price for a 2 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
+Rs. 1,443/month is starting price for a 5 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
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