Life insurance is one of the most popular options for financial planning. Although the primary purpose of a life insurance policy is to provide your family with financial assistance in the event of an untimely death, it also helps in wealth accumulation. But is the sum insured received at maturity or after the death of the insured taxable? Let’s find out:
In accordance with Section 10(10D) of the Income Tax Act 1961, death benefits are always exempt from tax. Maturity benefits, however, are taxed based on premiums.
The amount at maturity for traditional policies is made up of two parts: the sum insured and the total bonuses accrued (in a participating plan) over the policy period.
This means that you have to separate the sum insured from the annual premiums declared on the amount for all those years.
In accordance with Article 10 (10D), the insured amount received at maturity is completely exempt from tax. At the same time, premiums received with the sum insured are also exempt under this section.
However, keep this in mind: you win tax exemption on policies issued after April 1, 2012, provided that the total premiums paid do not exceed 10% of the insured amount of the policy. However, if the policies were issued before April 1, 2012, the sum insured would be free of any tax incidence if the total premiums do not exceed 20% of the insured amount.
To qualify for tax relief under Section 80C of the Act, life insurance policies must meet similar conditions.
However, the tax consequences for Unit Linked Insurance Plans (ULIP) are radically different. In accordance with the tax regulations announced as part of the 2021 budget, for ULIPs with annual premiums of up to ₹2.5 lakh issued on or after February 1, 2021, the yield to maturity would be treated as capital gains and would be taxed under Section 112A of the Act.
Life insurance is a contract between a policyholder and an insurer.
First publication: December 05, 2022, 08:27 STI