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Things to know about the taxability of life insurance Policy Payouts

When we talk about tax saving instruments, then most of the individuals use insurance products to do so. People generally find tax planning complicated and confusing. According to Income Tax Act, the life insurance premium paid up to Rs1.5 lakh are exempted from tax deduction under section 80C. According to financial experts, it is advisable that a person should not mix their investments and insurance needs. It is important to know in details that how taxability of life insurance policy payouts works and then buy an insurance product to use it as a tax saving investments.

In order to meet the targets of tax, saving limits people generally end up buying insurance products like endowment and ULIP plan in rush. Going for investment cum insurance plan may result beneficial for you but if you want to gain maximum tax benefit then it is always advisable not to mix the investment and insurance needs.

To help you know more about the taxability of life insurance policies payouts, here we have discussed in details that how the taxability of life insurance works.

Life Insurance Premium Which is Tax Deductible?

Any amount that is paid by the insured as a premium towards life insurance for the spouse, children or yourself is qualified for tax advantage under section 80C of Income Tax Act.  However, the premium paid by the policyholder for siblings/parents/in-laws in not eligible for tax deduction. Under section 80C of Income Tax Act up to Rs1.5lakh of tax benefit is available. Moreover, the sum assured is also tax-free in the hand of the receiver. However, the insured should keep in mind that in this policy the insured can avail the tax benefit only once as you are investing for a single time only.                                      

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

Under section 10(10) D of Income Tax Act, 1961 the maturity proceeds i.e. the sum assured amount on maturity of the policy plus any bonus are tax-free. Under this section, if the insured surrender the policy or in the case of demise of the policy holder the death benefit paid to the beneficiary are completely tax-free vary according to the conditions.

Under the following situations, the policy proceeds are taxable for the policyholder.

  • In case if the life insurance policy is issued after 01.04.2003 but before 31.01.2003 then as per section 10(10) D the policy proceeds are taxable if the premium paid any year exceeds 20% of the actual sum assured. Under section 80C(3A) it has been explained about 10(10)D that the actual sum assured means the least sum assured in all policy years excluding the bonus amount which is payable above the assured amount. The actual sum assured amount should not include any premium which is needed to be returned to the policyholder.
  • In case the policy is issued after 01.04.2012 then the limit of 20% premium paid changes into 10%.
  • Under life insurance policy, in case the policyholder suffers from the critical illness or severe disability then under the specified sections of Income Tax Act, the 10% 0f the limit is increased to 15 % if the policy is issued after 01.04.2013. The tax benefit is only applicable if the disability comes under specified section i.e.80U and the critical illness comes under section 80DDB.
  • If, in any year the premium paid exceeds the directed percentage i.e. 10%,15% or 20% of the actual sum assured then in the year of receipt the whole policy proceeds will get taxed. Although, in the case of demise of the policy holder, where the beneficiary receives the sum assured amount the same policy proceeds will be tax-free even if the premium paid in any year surpass the directed percentage of Sum assured. 

Why Insurance Policies are More Tax Beneficial?

Term insurance plan or life insurance policies are more tax beneficial because of its benefits. Generally, in term insurance plan the sum assured are very high and re multiple of the annual premium. For example, if you are 30 years old and the sum assured of the policy is Rs1 crore then the annual premium of the policy will range from Rs6,000-12,000. The term insurance plans do not provide any maturity benefit.

Under the guidelines of IRDA, if a person aged less than 45 years buy a life insurance policy of 10 years tenure then the sum assured will be 10 times the yearly premium. So, the insured will surely receive the tax benefit. However, on the other hand, if the buyer is above 45 years of age and the tenure of the policy is less than 10 years, then the minimum sum assured will be limited. In this case, the insured might lose the tax benefit.  

Many insurers provided customized plans under which the insured can choose the sum assured. So, you can choose the sum assured according to your own choice, if you want to avail tax benefit. On contrary to this, opting single premium insurance policies are the worst choice. Single premium insurance policies are generally marked as investment plans, which offers very low sum assured as compared to the term plan. Moreover, these plans have high premium rates. Hence, single premium insurance plans are not qualified for the tax deduction. 


Before purchasing any financial product considering its tax structure is one of its critical elements. Although, one must never purchase an insurance policy just to save taxes.

If you really want to save bundles on taxes then you must always keep the investments and insurance needs separate. As, in term insurance plans the sum assured amount is very high, so one can receive tax advantage under it. 

It is important to understand that a life insurance policy demands a long term commitment as one has to pay the yearly premium. So, prior zeroing in on a policy it is important to jot down key features and check that under which tax bracket the policy comes.

You may also like to read: How Your LIC Premiums Can Help You Save Income Tax