Yes, life insurance payouts are generally tax-free in India. The death benefit received by the nominee is fully exempt from tax under the Income Tax Act, 1961. However, maturity benefits may be taxable if the policy does not meet certain conditions, per the prevailing tax laws.
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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.
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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.Â
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.
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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
Benefit Type
Section
Old Regime
New Regime (Budget 2025)
Premium Deduction
80C
Yes
No
Maturity Proceeds
10(10D)
Yes
Yes
Death Benefit
10(10D)
Yes
Yes
ULIP Gains (High Premium)
112A
Taxable
Taxable
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:
Criteria
Tax Treatment
ULIP with premium ≤ ₹2.5 lakh/year
Exempt under 10(10D)
ULIP with premium > ₹2.5 lakh/year
LTCG tax @ 12.5% on gains
Exemption limit
LTCG up to ₹1.25 lakh/year is exempt
Asset type
Taxable regardless of equity or debt allocation
Holding period
1 year minimum to qualify as LTCG
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?
Feature
Old Regime
New Regime (Budget 2025)
Section 80C benefit
Available (₹1.5 lakh)
Not available
Section 10(10D) benefit
Available (with conditions)
Available (same rules apply)
Standard deduction
₹50,000
₹75,000 (for salaried)
Best for
Those with higher deductions
Those with simple salary structure
Taxability on Life Insurance Surrender and Bonus Benefits
Type
Tax Treatment
Surrender before 2 years
Fully taxable (no 10(10D) benefit)
Surrender after 2 years
10(10D) benefit may apply
Bonuses (on traditional plans)
Tax-free if maturity qualifies for 10(10D)
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.
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 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 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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