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Taxability of Life Insurance Policy Payouts

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 Tax Benefits Under the Income Tax Act

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.

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Section 10(10)D of the Income Tax Act, 1961

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.

For ULIP plans the tax exemption is limited to Rs. 2.5 Lacs, which means the plans with an annual premium of more than Rs. 2.5 Lacs will not be granted any tax exemption in life insurance policies.

What is the Taxation on Life Insurance?

To answer the question is life insurance taxable, let us take a look at the taxation on 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.

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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

  • Is life insurance taxable in India?

    Ans: You can claim life insurance tax benefits on the premiums paid under sections 80C and 80D. Other than that, you can take a look at the taxation on life insurance to get a better understanding of the applicable income tax on life insurance policy.
  • Are life insurance policy payouts taxable in India?

    Ans: The taxation on life insurance payout depends on the type of payout. For example, on policies bought after 30th March 2023, the maturity payout will be taxable only if the annual aggregate premium is more than 5 Lacs for regular life insurance policies. For ULIP plans, the limit is at 2.5 Lacs, and policies with premiums more than 2.5 Lacs per year will have to pay income tax on life insurance policy. However, the death benefit payout in life insurance is tax-free.
  • Are premiums paid for life insurance policies tax-deductible?

    Ans: Yes, premiums paid for life insurance policies are eligible for tax exemption under Section 80C of the Income Tax Act.
  • Are the maturity proceeds from a life insurance policy taxable?

    Ans: No, the maturity proceeds from a life insurance policy are generally tax-exempt under Section 10(10D) of the Income Tax Act.
  • Are death benefits received from a life insurance policy taxable?

    Ans: No, death benefits received from a life insurance policy are tax-exempt under Section 10(10D) of the Income Tax Act.
  • What is the tax treatment of surrender value in a life insurance policy?

    Ans: The tax treatment of surrender value depends on the specific provisions of the Income Tax Act. It may be subject to taxation.
  • Do riders attached to a life insurance policy have separate tax implications?

    Ans: The tax treatment of riders varies depending on the nature of the rider and the provisions of the Income Tax Act.
  • Are there any tax benefits available for premiums paid on spouse's or children's life insurance policies?

    Ans: Yes, tax benefits are available for premiums paid on spouse's or children's life insurance policies under Section 80C of the Income Tax Act.
  • Is there a maximum limit for tax deductions on life insurance premiums?

    Ans: Yes, the maximum limit for tax deductions on life insurance premiums is ₹1.5 lakh per financial year under Section 80C of the Income Tax Act.
  • What is the tax treatment of life insurance policy payouts in case of policy surrender?

    Ans: The tax treatment of life insurance policy payouts upon surrender depends on the specific provisions of the Income Tax Act and may be subject to taxation.
  • Where can I find detailed information on the taxability of life insurance policy payouts?

    Ans: For detailed information on the taxability of life insurance policy payouts, it is recommended to refer to the Income Tax Act or consult a tax professional.
  • How to calculate the term insurance premium online?

    Ans: You can easily calculate the term insurance premium online by using the term plan calculator online tool
  • What are the benefits of term life insurance?

    Ans: Here are 4 common benefits of term insurance:
    • Low premium rates
    • Tax Benefits
    • Death Benefit
    • Long term coverage
  • What are the benefits of term life insurance?

    Ans: Below mentioned are the key features of a best term insurance policy in India:
    • Affordable premium rates
    • Long-tenure life protection
    • Easy to understand and buy
    • Riders availability
    • Whole life protection
    • Tax benefits
  • What are the key features of a best term insurance plan in India?

    Ans: Let's understand what is term life policy here. Term insurance offers financial protection for a certain period to the policyholder, thereby, offering a lump sum payout if the policyholder unfortunately passes away during the policy term.

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