Taxability of Life Insurance Maturity Amount

While life insurance is a smart way to take care of the financial needs of your family even after your demise, most people buy one for saving taxes. The premiums paid for life insurance are eligible for tax deductions of up to Rs. 1.5 lakhs in a year under Section 80C of the IT Act.However, do you know how the insurance payouts are taxed? Let us have a look at five essential things you should know about the taxation of life insurance payouts.

The sum assured is received by the policy nominee in case of your demise. Under Section 10 (10D) of the IT Act, any proceeds received by the life insurance beneficiary is entirely tax-free in India. While there are a few exceptions, rest assured that in most cases your policy nominee will receive the sum assured in full?

If you have paid insurance premiums throughout the policy tenure, you are entitled to receive the maturity benefit in most different types of life insurance policies. As per Section 10 (10D), even these proceeds received by the policyholder upon maturity are tax-free in most cases.

A Keyman insurance policy is one where an employer is the proposer and premium payer of the policy, and the employee is the insured. In case if you are covered under one such policy and the employer is paying the premiums, the maturity benefit and even the death benefit are not tax-free under Section 10(10D).

As per the IT Law changes in 2013, maturity proceeds from policies that are issued after 01/04/2003 but on or before 31/03/2012 whose premiums exceed 20% of the sum assured in any year are not tax-free for the insured. For policies purchased after 01/04/2012, this limit is 10%.

Under Section 194DA, if the insured receives any maturity benefit or bonus from the insurance provider which is not exempt under Section 10(10D), a TDS of 2% will be applicable on the received amount. This also means that all the proceeds exempt under Section 10(10D) are exempt from paying any TDS.Knowing about the taxation of life insurance payout is as essential as knowing the tax deductions on the insurance premium. Plan well and choose correctly not just to save taxes but also provide a much-needed safety net to your family.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.