The Buyt Desk
Many think that the benefit amount received on the life insurance policy is always tax-free. But it is not tax-free all the time. Let us look into it in detail.
A life insurance policy matures when the term of the policy is completed with all premiums paid. When the premiums are paid regularly and on time, be it money back or endowment plan, on completing the term, the policyholder gets the maturity value. A life insurance’s maturity amount includes the sum assured and the total of bonuses accumulated over the years. This maturity amount is not always tax-free. The income tax act has some rules and conditions that when a life insurance policyholder fulfils, he /she will be eligible for tax benefits. Life insurance policies are usually bought for a long term of 15 to 20 years. And in such a long time there will be many amendments to the income tax act. Some tax-related changes happen every year. So the rules for tax paid on maturity amount also keep changing every few years. Before that let us understand maturity proceedings.
How is Life Insurance Maturity Amount calculated?
Generally, the life insurance maturity amount has two components. The amount of sum assured is the first and basic component. The total profit plan and bonuses accumulated over the years are the second components of maturity. For example, if you buy a policy for 15 years and a sum assured of Rs 5 lakhs. You will be paying an annual premium of Rs 33333/-. So at maturity, that is at the end of 15 years your first component of the sum assured will be Rs 5 lakhs and based on the bonus declared by the insurance company, the second component will be a bonus accrued over 15 years and approximately Rs 3.5 lakhs. So on maturity, the total payout you will be receiving is Rs.8.5 lakhs.
What are Life Insurance Tax Rules and Conditions?
Section 10(10D) of the Income Tax Act says that the sum assured is completely tax-free when received on maturity or on surrender of the policy or upon the insured’s death. And even the bonuses received with a sum assured under these conditions are tax exempted under Section 10(10D). But it has a condition to be met to avail of the tax benefit under section 10(10D). And that condition is a specific limit of the ratio of premium to sum assured and this limit is set by the Indian income tax department. And this ratio limit has been altered many times over the years. Currently, only 2 conditions are applicable based on the policy purchase date, before or after 1 April 2012.
Let us look into the condition in detail. If the policy is brought after 1 April 2012 and the policy premium paid is 10% or less of the sum assured, the maturity amount of a life insurance policy received including bonus is completely tax-free under Section 10(10D) of the income tax act else it will be taxed as per the income tax slab. In short, the maturity amount will be tax-free when the sum assured is at least 10 times the premium for policies issued after 1 April 2012.
If the policy is brought between after 1 April 2003 and 1 April 2012, and the policy premium paid is 20% or less of the sum assured, the maturity amount of a life insurance policy received including bonus is completely tax-free under Section 10(10D) of income tax act else it will be taxed as per the income tax slab. In short, for policies issued before 1 April 2012, the sum assured must be at least 20 times the premium for the maturity amount to be tax-free.
What are the tax liabilities of single premium insurance policies?
Maybe the taxpayer is not sure as to how the single premium insurance policy should be treated. Single premium insurance policies do not have their premium below 10% or 20% of the sum assured as the policyholder will be paying a single lump-sum premium. So the maturity amount received by the policyholder is taxable. Under section 10(10D) of the Income Tax Act, Single premium insurance policies do not get tax exemption.
