Is Life Insurance Payout Taxable in India?

What Are Life Insurance Payouts?

Life insurance payouts generally fall into three categories:

• Death Benefit: Paid to the nominee if the policyholder dies during the policy term. This is fully tax-exempt under Section 10(10D) of the Income Tax Act.

• Maturity Benefit: Paid to the policyholder if they survive the policy term. It is tax-free only if specific conditions under Section 10(10D) are met (like premium limits and policy type).

• Surrender Value: Paid when a policy is terminated before maturity. It may be taxable if the policy doesn't meet the required tax-exemption conditions or is surrendered early.

Each type of payout is taxed differently depending on policy terms and applicable tax laws.

Which Life Insurance Payouts Are Taxable in India?

Life insurance payouts in India can be either tax-free or taxable, depending on the type of payout and certain conditions under the Income Tax Act. Here's what you need to know:

Death Benefits – Always Tax-Free

Under Section 10(10D) of the Income Tax Act, any amount the nominee receives upon the policyholder's death is fully exempt from income tax. This exemption applies regardless of the premium amount paid or the type of policy. 

Maturity Benefits – Tax-Free Only If Conditions Are Met

The money you receive from a life insurance policy when it matures (or even if you surrender it) can be tax-free, but only if certain conditions are met.

Here are the basic rules you need to know:

For Policies Issued After April 1, 2012

• The yearly premium must not exceed 10% of the sum assured (the life cover).

• If this condition is met, the entire maturity amount — including any bonus — is completely tax-free under Section 10(10D).

For Policies Issued Between April 1, 2003 and March 31, 2012

• The premium must not exceed 20% of the sum assured.

• If it does, the maturity amount becomes taxable.

For Policies Issued on or After April 1, 2013, Covering Disabled or Critically Ill Individuals

• If the policy covers someone with a disability (as defined under Section 80U) or a specified disease (under Section 80DDB), the premium limit is relaxed.

• In this case, you can pay up to 15% of the sum assured and still enjoy tax-free maturity.

When Is the Maturity Amount Taxable?

The maturity proceeds will be taxable in these cases:

• If a life or term insurance policy was issued between 1 April 2003 and 31 March 2012, and the premium paid exceeds 20% of the sum assured, the maturity proceeds will be taxable.

• If the policy was surrendered early, and does not qualify for exemption.

• If you have a high-premium policy (especially recent ones) that crosses ₹5 lakh per year in premiums (for non-ULIPs issued after April 1, 2023).

• For ULIPs issued after February 1, 2021, if total annual premiums exceed ₹2.5 lakh, then maturity proceeds become taxable.

The maturity amount will be added to your income and taxed under "Income from Other Sources."

Life Insurance Tax Benefits Under the Income Tax Act

The Government of India offers income tax relief on life insurance policies to help policyholders get the most benefits. Although various sections offer 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 2025-26.

*Note: Tax benefits are subject to changes in tax laws

Recent Changes and Budget 2025 Updates on Taxation

What is TDS on Life Insurance Policy?

As per the Union Budget 2024-25, 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 less tax will be deducted from your life insurance payout, resulting in a higher amount the policyholder or nominee receives.

Taxation of Life Insurance Policy – Detailed Breakdown

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. The policyholder can claim this deduction 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 insured person's demise 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 a 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. It 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.

What is the Taxation on High-Premium ULIPs?

As per updates from Budget 2025:

• ULIPs with premiums > ₹2.5 lakh/year are no longer fully exempt under 10(10D).

• Gains from such policies are taxed as capital gains under Section 112A.

Updated ULIP Tax Rules:

Budget 2025 Update: New Rule for ULIP Taxation

Before 2025, non-10(10D) compliant ULIPs (e.g., exceeding premium or sum assured criteria) were taxed under Income from Other Sources.
Now, such ULIPs will be taxed only under 'Capital Gains', simplifying tax classification and reducing burden for lower-premium investors.

Which Tax Regime to Choose: Old vs New?

Taxability on Life Insurance Surrender and Bonus Benefits

What is Tax Liability of Single-Premium Life Insurance Policy?

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.

How To Save on Taxes Under the Latest Budget?

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.

Wrapping It Up!

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.

FAQs