Taxability of Life Insurance Policy

Investment in a life insurance policy for yourself, spouse and children is eligible for deduction under section 80C of the Income Tax Act. Individuals and HUFs are eligible for a deduction on purchasing a life insurance policy up to Rs. 1,50,000. Deduction of life insurance premiums depends on the policy issue period, and the deduction limit cannot be more than 10%,15%, or 20% of the premium amount, with certain other conditions. Life insurance maturity is taxable under the head of Income From Different Sources and is subject to TDS. However, maturity at the death of a policyholder shall be exempt from tax in the hands of the nominee. The article will discuss the deduction of a life insurance policy under section 80C.

Tax Benefits on Life Insurance Policy

Life insurance policies offer maturity/death benefits and tax deductions under Section 80C and Section 10(10D) of the Income Tax Act, of 1961. The tax deductions provided under both the sections for life insurance policy are provided below.

Deduction under Section 80C

If you have paid an insurance premium to insure your own life or the life of your spouse or child, such premium payments are eligible for deduction under Section 80C of the Income Tax Act. Irrespective of your child being dependent or independent, minor or major, married or unmarried, the deduction under section 80C shall be allowed. 

An individual and a HUF can claim this deduction under Section 80C for life insurance premium paid up to Rs.1.5 lakh every year. This deduction is available along with other eligible items like NSC, PPF, fixed deposits, ELSS, tuition fee paid, home loan repayment, provident fund contribution etc.

Many taxpayers doubt whether this deduction is available only in respect of life insurance cover taken with LIC. This is not true. 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. 

Further, here it is important to note that a policy issued after 1 April 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB.

“Sum assured” simply means the minimum amount assured under the policy on the happening of the insured event at any time during the policy. This amount does not include the premium, which has been agreed to be returned or any payment of bonus on the policy.

Exemption under Section 10(10D) on Maturity Amount Received

When the premium paid on the life insurance policy does not exceed 10% of the sum assured for policies issued after 1 April 2012, 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). Even the amount received as a bonus is exempt from tax under this section.

However, when the premium paid on the life insurance policy issued before 1 April 2012 does not exceed 20% of the sum assured, any amount received on maturity of a life insurance policy or amount received as a bonus is fully exempt from Income Tax under Section 10(10D). 

The amount received on maturity of policies taken after 1 April 2013 on the life of a person with a disability or a disease specified under Sections 80U and 80DDB, respectively, is tax-fee provided the premium paid does not exceed 15% of the sum assured. 

Situations Where Maturity Amount of Policy is Taxable

• As per section 10(10D), in case of a life insurance policy issued after 1 April 2003 but on or before 31 March 2012, if the premium payable exceeded 20% of the actual sum assured, the maturity proceeds are taxable in the hands of the insured.
• In case the life insurance policy is issued after 1 April 2012 and the premium payable exceeds 10% of the actual sum assured, the maturity proceeds are taxable. 
• In case the life insurance policy is issued after 1 April 2013 on the life of a person with a disability or a disease specified under Sections 80U and 80DDB, respectively, if the premium payable exceeds 15% of the actual sum assured, the maturity proceeds are taxable. 
• If the premium amount of one policy or the aggregate premium amount of multiple policies issued on or after 1 April 2023 exceeds Rs. 5 Lakh, then no exemption shall be available under section 10(10D).

However, please note that in the case of the death of the insured, where the nominees receive the policy maturity proceeds, it will be tax-free in the hands of the nominees even if the premium paid in any year crosses the above-prescribed percentage of the sum assured.

TDS on Life Insurance Policy

If the amount received from a life insurance policy is more than Rs 1 lakh on policies not covered under an exemption under Section 10(10D), then TDS @ 2% shall be deducted by the insurer before making this payment. TDS will also be deducted on bonus payments. 

If the amount received is less than Rs 1,00,000, no TDS shall be deducted, but the amount received shall be fully taxable for you. You can claim credit for the TDS deducted in your Income Tax Return. 

Tax Liability of Single Premium Insurance Policies

Taxpayers may not be sure about how payouts from a single-premium insurance policy must be treated. Let us understand the taxability with an example. 

Consider that Sandesh had taken a policy from an insurance company with a maturity value of Rs 1,10,000. He paid a single premium of Rs 45,000 on 16 September 2013. 10% of the premium works out to be Rs 11,000. The premium of Rs 45,000 exceeds 10% of the sum assured. Therefore, the insurance maturity proceeds are taxable, and not entitled to exemption under section 10(10D) of the Income Tax Act. 

Sandesh surrendered the policy on maturity on 16 September 2024. Since the maturity payment is above Rs 1 lakh, the insurance company is liable to deduct tax on the maturity proceeds. The insurance company is liable to deduct tax at 2% of the income component of the payment, before releasing the payment to the taxpayer. Here, the TDS would be on the net maturity proceeds i.e., on Rs 65,000 (1,10,000-45,000). 

The TDS would be 2% on Rs 65,000 amounting to Rs 1,300. The net proceeds receivable by Sandesh would be Rs 63,700 (65,000-1,300). While filing his income tax return, Sandesh should report the net maturity proceeds under ‘income’ from other sources’. Also, Sandesh can claim the credit for TDS of Rs 1,300 against his tax liability determined while filing his return of income.