January 31, 2023

Understanding the Taxability of Life Insurance Policies: A Quick Guide

Life insurance policies can offer various tax benefits under the Income Tax Act of 1961. Understanding the taxability of these products is a must before you invest in anylife insurance policy in India. Be aware of how policies are taxed to maximize your benefits in turn. This guide will provide a quick overview of the taxability of life insurance policies in India.

 

Taxation of Life Insurance Policies- Things to Remember 

  1. Premiums: Premiums paid for traditional life insurance policies are eligible for tax deductions under Section 80(80C) of the Income Tax Act, 1961. Policyholders are allowed to claim a tax deduction of up to INR 1.5 lakh on the premium paid for a traditional life insurance policy.
  2. Death Benefit: Death benefits received by nominees or beneficiaries of a life insurance policy are tax-free under Section 10(10D) of the Income Tax Act, 1961. This means that the money received by the nominee or beneficiaries as death benefit is not taxable under any circumstances as per law. 
  3. Maturity Benefit: Maturity benefits received from traditional life insurance policies are also tax-free under Section 10(10D) of the Income Tax Act, 1961. This means that the money received by the policyholder upon maturity of the policy is not taxable as long as the premium paid for the policy is not more than 10% of the sum assured. If the premium for a life insurance policy exceeds 10% or 20% of the sum assured, as the case may be, all money received from the policy is entirely taxable.
  4. Surrender Value: Surrender values received from traditional life insurance policies are taxed as per the income tax slab of the policyholder.
  5. Loans Taken Against Policy: Interest on loans taken against traditional life insurance policies, such as whole life insurance, is taxable as per the income tax slab of the policyholder.

 

It’s important to note that a policy’s taxability depends on your policy type. Some life insurance policies may have different tax implications as well. It is also important to remember that tax laws are subject to change, and it’s a good idea to pick the brains of a professional or expert to stay on the right side of your financial strategy. 

 

Taxation of ULIPs and Endowment Plans

Unit-linked investment plans (ULIPs) offer a combination of insurance and investments. Their tax treatment is slightly different from regular insurance policies. While they provide deductions up to Rs. 1,50,000 under Section 80C, they might be subject to LTCG (long-term capital gains) tax just like other equity-based investment avenues if the total premiums exceed ₹2.5 lakhs. This is imposed at 10% (if the gains exceed ₹1 lakh), although taxes are not payable in case of the policyholder’s demise. ULIPs before 1st February 2022 will not have any tax liabilities as well. 

 

Endowment plans, however, come with the same benefits as other life insurance policies u/s 80C and 10D. These are some tax rules that you should also keep in mind. 

 

Tax Benefits Under Section 80D 

There are critical illness insurance riders that you can also add to your life insurance policy. In this case, you may be eligible for tax deductions under Section 80(80D) of the Income Tax Act. This deduction is up to Rs. 25,000, and senior citizens can get deductions up to Rs. 50,000. This is an additional benefit on offer for those choosing these riders. 

 

TDS On Life Insurance Policies

Beginning in October 2014, if the payout from a life insurance policy is greater than Rs 1,00,000 and the policy is not excluded under Section 10(10D), the insurer must first deduct TDS @ 1% before making the payment. Bonus payments will also be subject to TDS deductions. In case the amount is less than ₹1,00,000, no TDS would be deducted, but the amount received will still be fully taxable. You can seek credit for the TDS taken in your income tax return.

 

Conclusion

In conclusion, life insurance policies can offer various tax advantages under the Income Tax Act 1961 in India. Still, it’s crucial to understand how they are taxed in order to make the most of these benefits. Therefore, to get the best out of the policy and tax benefits, it’s always a good idea to take expert advice regarding your specific life insurance policy and its taxation criteria. 

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