Term insurance is a type of life insurance that provides life cover for a specific duration on payment of a particular amount as premium. However, as the maturity date nears, you may wonder how the proceeds are going to be taxed. Let’s break down the tax exemptions on life insurance maturity for you here.
A useful financial tool that offers your loved ones a safety net is life insurance. Life insurance has maturity benefits in addition to its primary goal of providing financial security in the case of the policyholder's death. When the policy's maturity date arrives, you can receive these benefits. However, depending on specific circumstances, these rewards may be taxable.
Upon meeting certain conditions, this provision usually exempts both death benefits and maturity income from income tax. Section 10(10D) of the Income Tax Act of 1961 exempts life insurance policy payouts from taxes in India under specific conditions. The money received under a life insurance policy, including bonuses, is tax-exempt as long as the premium doesn't exceed 10% of the sum insured (or 20% for plans issued between April 1, 2003 and March 31, 2012). This exemption is applicable as long as the policy is not a Keyman insurance policy. Moreover, the policyholder should not have received the maturity proceeds in the case of policies covered under Section 80C, 80DDA or 80DD of the Income Tax Act.
The Central Board of Direct Taxes (CBDT) has changed the formula for determining the tax-exempt sums from life insurance plans in recent years. If the yearly premium paid for insurance issued on or after April 1, 2023, exceeds ₹5 lakh, the maturity amount won’t be completely tax-exempt. It means that the maturity proceeds may be taxable if you have several policies and the total premium exceeds this cap.
Let's delve deeper into the tax implications of life insurance payouts, focusing on maturity proceeds:
First off, the maturity proceeds from life insurance policies are in most cases eligible for Section 10(10D) tax exemption. This means when your policy matures, the lump sum – including any bonus mentioned in the policy – usually lands in your lap tax-free.
There are a few scenarios where you might need to pay tax:
To ensure the tax compliance of life insurance payouts, policies not eligible under Section 10(10D) are subject to Tax Deduction at Source (TDS). As per Section 194DA of the Income Tax Act, if the sum payable exceeds ₹1 lakh in a financial year, TDS at 1% is deducted (20% if no PAN is provided).
You can claim a refund for the TDS deducted while filing your income tax return.
When filing your return or calculating your tax here are a few crucial things to keep in mind:
• Tax laws are changeable: They can change. To make sure you're reaping the most benefits, it's important to keep up with the most recent rules.• Speak with a tax expert: A qualified tax advisor should be consulted for complicated cases, to understand how these laws apply to your particular policy or to choose the ideal life insurance policy for tax exemption. • Premium-to-sum assured ratio: This is an important ratio. The maturity proceeds will be subject to taxation if the premium surpasses the designated threshold of either 20% or 10%. • Sum assured: In general, a larger sum assured raises the possibility of tax-free maturity proceeds. • Long-term view: Purchasing life insurance is an investment for the future. Making decisions that fit your financial situation might be made easier if you are aware of the tax aspects.
• Life insurance provides significant tax benefits, especially for long-term budgeting. You can maximise your tax exemption on life insurance maturity by selecting your policy wisely and keeping up with laws.• Determining the tax due on maturity proceeds requires an understanding of the premium-to-sum assured ratio. • It's important to pay attention to the date of policy issuance because plans issued after April 1, 2023, are subject to more strict tax regulations. • If premiums are within the specified ranges (₹5 lakh for more recent insurance), all exemptions apply. • Compared to standard life insurance policies, additional rules apply to other kinds of life insurance policies, such as Keyman insurance policies, unit linked insurance plans, etc.
1. How does Section 10(10D) apply to life insurance maturity?
You can claim tax deduction and get maturity benefits under Section 10 (10D) for life insurance policy. The conditions for application are:
2. Can I claim tax exemption on term life insurance?
Yes, you can get a tax deduction on the premium paid for a term life insurance plan under Section 80C of the Income Tax Act, 1961. The maximum amount you can claim is ₹1.5 lakh per year.
3. What are the tax benefits of life insurance policies?
Under the Income Tax Act 1961, policyholders can claim various tax-saving benefits. Section 80C allows you to claim up to ₹1.5 lakh deductions for premiums paid towards life insurance policies. In addition, Section 10(10D) allows exemptions on proceeds from life insurance policies. The only condition is that the premium paid should not exceed 10% of the sum assured for policies issued after April 1, 2012. For policies issued before April 1, 2012, the premium should not exceed 20% of the sum assured.
4. Are all life insurance policies eligible for Section 10(10D) exemption?
Not all life insurance policies qualify for Section 10(10D) tax exemption. There are specific conditions you need to meet to claim the exception, like:
5. How does premium amount affect tax exemptions under Section 10(10D)?
According to the Section 10(10D) a policyholder can not claim tax exception if it exceeds 10% of the actual sum assured. If its premium is below 10% you can claim the tax exception.
6. Can I claim tax exemption for term insurance maturity?
The maturity benefit amount may be exempt from tax, subject to certain terms and conditions. The full death benefit amount is always tax-exempt. The eligibility criteria are:
