Life Insurance Proceeds: Taxable In India?

Life insurance is a contract between an individual and an insurance company, where the individual pays a premium to the insurance company in exchange for a lump sum payable to their family upon their death. In India, the Union Budget 2023 has updated the tax regulations for insurance policies issued after April 1, 2023. While life insurance proceeds are typically not taxable as income, they can be taxed as part of your estate if the amount passed to your heirs exceeds federal and state exemptions. The tax benefits and deductions depend on the type of insurance policy, the premium paid, and the sum assured.

Maturity/death benefits and tax deductions under Section 80C and Section 10(10D) of the Income Tax Act, 1961

The Income Tax Act of 1961 offers tax benefits on life insurance policies in India. These benefits are available under Section 80C and Section 10(10D) of the Act. Here's a detailed overview of these sections and how they apply to maturity and death benefits:

Section 80C:

Section 80C of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to claim deductions on life insurance premiums paid during a fiscal year. The maximum deduction allowed under this section is Rs. 1.5 lakh. This deduction is applicable irrespective of the age, dependency, or marital status of the insured individual's spouse or child. It is important to note that this deduction is available for premiums paid towards a life insurance cover taken with any insurer approved by the Insurance Regulatory and Development Authority of India (IRDAI).

To claim the deduction under Section 80C, the life insurance premium paid should not exceed certain thresholds:

• For policies issued after April 1, 2012, the premium should not exceed 10% of the sum assured.
• For policies issued before April 1, 2012, the premium should not exceed 20% of the sum assured.
• For policies issued after April 1, 2013, covering individuals with disabilities or specific diseases, the premium should not exceed 15% of the sum assured.

Section 10(10D):

Section 10(10D) of the Income Tax Act provides tax exemptions on insurance claims, maturity amounts, and bonuses received from life insurance policies. This section applies to all types of life insurance policies, including Unit-Linked Insurance Plans (ULIPs). The exemptions and deductions under this section are available under the following conditions:

• The premium paid for policies purchased between April 1, 2003, and March 31, 2012, should not exceed 20% of the sum assured.
• For policies purchased after April 1, 2012, the premium should not be more than 10% of the sum assured.
• For policies purchased after April 1, 2013, covering individuals with disabilities or specific diseases, the premium limit is revised to 15% of the sum assured. This applies to individuals specified under Sections 80U and 80DDB of the Income Tax Act.

It is important to note that the tax benefits under Section 10(10D) do not apply to Keyman insurance policies or payouts received under Sections 80DD(3) or 80DDA(3) of the Income Tax Act. Additionally, the deductions under this section have no maximum limit and include bonuses and surrender values.

In summary, Sections 80C and 10(10D) of the Income Tax Act, 1961, offer tax benefits and deductions for individuals and HUFs with life insurance policies in India. These sections provide incentives for individuals to secure their families' financial future and plan their taxes efficiently.

Premiums exceeding Rs 5 lakh per year are taxable

In India, the Union Budget 2023 has introduced new tax regulations for insurance policies issued after 1 April 2023. According to these updates, income received from insurance policies (excluding unit-linked policies) with an annual premium exceeding Rs 5 lakh will be taxable, except in the case of the death of the insured. This means that if the total premium amount for a life insurance policy is more than Rs 5 lakh per year, the maturity proceeds will be subject to taxation.

The tax implications of life insurance policies can be complex, and it is essential to understand the conditions under which the proceeds may be taxable. In the context of premiums exceeding Rs 5 lakh per year, here are some key points to consider:

• Tax Deductions: Under Section 80C of the Income Tax Act, individuals and Hindu Undivided Families (HUFs) can claim tax deductions on life insurance premiums paid up to Rs 1.5 lakh annually. This deduction is applicable for premiums paid towards insuring one's own life, their spouse, or child. It is important to note that the premium should not exceed a certain percentage of the sum assured, depending on the policy issue date.
• Exemption under Section 10(10D): When the premium paid on a life insurance policy does not exceed specified percentages of the sum assured (10% for policies issued after 1 April 2012, 20% for policies issued before that date), the maturity/surrender amount received is fully exempt from tax under Section 10(10D). This exemption applies to both the maturity amount and any bonuses received.
• Situations with Taxable Maturity Amount: As per Section 10(10D), if the premium payable exceeds the specified percentages of the actual sum assured, the maturity proceeds become taxable. For policies issued after 1 April 2012, a premium exceeding 10% of the sum assured makes the maturity proceeds taxable. Similarly, for policies issued after 1 April 2013 on the life of an individual with a disability or specified disease, a premium exceeding 15% of the sum assured results in taxable maturity proceeds.
• TDS on Life Insurance Policy: If the amount received from a life insurance policy exceeds Rs 1 lakh, the insurer is required to deduct TDS at 5% before making the payment. This applies to policies not covered under the exemption under Section 10(10D). The TDS will also be deducted on bonus payments.
• Single-Premium Insurance Policies: The taxability of single-premium insurance policies depends on whether the premium exceeds a certain percentage of the sum assured. If the premium exceeds this threshold, the maturity proceeds are taxable, and the policy is not entitled to exemption under Section 10(10D) of the Income Tax Act.

It is important to carefully review the terms and conditions of your life insurance policy, as well as stay updated with any changes in tax regulations, to understand the tax implications and make informed financial decisions.

Tax liability of single premium insurance policies

Single premium insurance policies offer tax benefits under Section 80C of the Income Tax Act, 1961. This allows policyholders to claim deductions on the premium amount paid, subject to certain limits.

The premium paid towards a life cover taken with any insurer approved by the Insurance Regulatory and Development Authority of India (IRDAI) is eligible for a Section 80C deduction. However, to claim this deduction, the life insurance premium paid should not exceed 10% of the sum assured for policies issued after 1 April 2012. For policies issued before this date, the premium should not exceed 20% of the sum assured to claim the deduction.

Additionally, the death benefit received by the nominees is tax-exempt under Section 10(10D) of the Income Tax Act, 1961. This means that the amount received by the nominees upon the policyholder's death is not taxable.

It is important to note that the tax laws in India may change, and policyholders should consult a tax advisor for specific guidance.

Tax deductions and exemption rules

In India, life insurance policies offer maturity/death benefits and tax deductions under Section 80C and Section 10(10D) of the Income Tax Act of 1961.

Deduction under Section 80C

An individual or a Hindu Undivided Family (HUF) can claim a deduction under Section 80C for life insurance premiums paid up to Rs. 1.5 lakh every year. This deduction is available alongside other eligible items like NSC, PPF, fixed deposits, ELSS, tuition fees paid, home loan repayment, and provident fund contributions. It is important to note that the life insurance premium paid should not exceed 10% of the sum assured for policies issued after 1 April 2012. For policies issued before this date, the premium paid should not exceed 20% of the sum assured to claim this deduction.

Exemption under Section 10(10D) on maturity amount received

When the premium paid on a life insurance policy does not exceed the prescribed limit of 10% or 20% of the sum assured, depending on the policy issue date, the amount received on the death of the insured or maturity/surrender of the life insurance policy is fully exempt from tax under Section 10(10D). This exemption also applies to any bonus amount received under the policy.

Situations where maturity amount of policy is taxable

According to Section 10(10D), there are specific scenarios where the maturity proceeds from a life insurance policy are taxable. These include cases where the premium payable exceeds the specified percentage of the actual sum assured, such as 20% for policies issued between 1 April 2003 and 31 March 2012, 10% for policies issued after 1 April 2012, and 15% for policies issued after 1 April 2013 on the life of a person with a disability or specified disease. However, in the case of the death of the insured, where the nominees receive the policy maturity proceeds, it will be tax-free even if the premium paid crosses the prescribed limit.

TDS on life insurance policy

If the amount received from a life insurance policy exceeds Rs. 1 lakh on policies not covered under an exemption under Section 10(10D), TDS (Tax Deducted at Source) at a rate of 5% shall be deducted by the insurer before making the payment. TDS will also be applicable on bonus payments. If the amount received is less than Rs. 1,00,000, no TDS will be deducted, but the amount received will be fully taxable, and the taxpayer can claim credit for the TDS in their Income Tax Return.

Tax liability of single premium insurance policies

In the case of single-premium insurance policies, if the premium exceeds 10% of the sum assured, the insurance maturity proceeds are taxable and not entitled to exemption under Section 10(10D). For example, if an individual paid a single premium of Rs. 45,000 on a policy with a maturity value of Rs. 1,10,000, the insurance company would deduct TDS at 5% on the net maturity proceeds before releasing the payment.

Tax deductions for individuals and Hindu Undivided Families (HUFs)

In India, a Hindu Undivided Family (HUF) is a separate taxable entity from its members, allowing families to pool their assets and save on taxes. HUFs are governed by Hindu law but are also available to Buddhists, Jains, and Sikhs. The formation of a HUF requires a legal setup and careful management.

To create a HUF, a family must meet certain conditions. Firstly, a HUF can only be formed by a family, and it must consist of a common ancestor and all their lineal descendants, including their wives and unmarried daughters. Secondly, there must be at least two members in the HUF, with at least one male member. The senior-most male member is known as the 'Karta' and is considered the head of the family. The Karta has sole authority over the HUF account and is responsible for handling the family's corpus.

The HUF has its own Permanent Account Number (PAN) and files tax returns independently of its members. It is taxed at the same rates as an individual, with an exemption limit of INR 2.5 lakhs in the old tax regime and up to INR 3 lakhs in the new tax regime. The HUF can claim various tax deductions and exemptions, such as those under Sections 80C, 80D, and 80G. Additionally, the HUF can take out insurance policies on the lives of its members and invest its income.

It is important to note that the members of a HUF have equal rights to the property, and any additions to the family through birth or marriage automatically become members. Dissolving a HUF requires the unanimous agreement of all members, which can be challenging and lead to disputes.

Frequently asked questions