Life Insurance Tax Deductions On Death Benefits

A life insurance policy is a financial instrument specially designed to minimise the financial impact on the family members in the event of the breadwinner’s untimely and unfortunate demise. When you buy a life insurance policy, you enter into a contract with the insurance company, wherein you agree to pay the premium towards the plan.The insurer agrees to pay a lump sum amount to the appointed nominee (beneficiary) as a death benefit in the event of your death before the plan’s maturity.When you purchase a life insurance policy, you must mandatorily appoint a nominee and mention their details in the application form. It is a part of the buying process. The nominee can be anyone - it can be your spouse, sibling, parents, or children; it is your prerogative.The insurance company will pay policy benefits, including the sum assured (death benefit) and other accrued benefits to the appointed beneficiary. The proceeds received from the insurance will help them take care of their future expenses as well as meet the liabilities and debts like a home loan, etc.

One of the striking features of life insurance policies apart from financial protection is the tax benefits it carries. Many people buy a life insurance policy mainly with a view to their tax liability in a financial year. The life insurance tax deduction is guaranteed by the Indian Income Tax Act, 1969.

• Tax benefit under Section 80C life Insurance policy of the IT act assures tax deduction on the money you pay as premium towards your life insurance policy. The maximum limit on tax deduction in a financial year is Rs. 1.5 lakhs.
  If the premium value is more than 10% of the sum assured, then the maximum tax benefit you get is 10% of the sum assured. Earlier, the tax deduction limit was 20% of the sum assured, which was revised in April 2012.
• Tax benefit under Section 10 (10D) Apart from the tax benefit available on the premium payment, the death benefits paid to the nominee are subject to tax deduction under Section 10 (10D). When the nominee receives the sum assured as the death benefit, it is not treated as income, and therefore it is tax-free. There is no limit on the maximum amount for tax exemption.

A lot of people worry about the beneficiaries having to pay taxes on the benefits they receive. One such situation is when the policyholders specifically mention that the death benefit must not be paid immediately upon death. In such cases, the amount is held by the insurance company.The insurance company pays the amount after the period of interest accumulation is over. This portion of the interest that the beneficiary receives is taxable. Thus, the recipient must pay tax on the interest accumulated since the policyholder’s demise and not on the sum assured.In another case, where the beneficiary must pay tax on the life insurance proceeds is in the form of inheritance and estate tax. Sometimes, the insurance proceeds go towards the estate of the deceased. This usually happens when the beneficiary passes away before the policyholder, and no other nominee is mentioned.Although such cases are rare, in such instances, the proceeds become part of the deceased’s estate, and it is subject to estate or inheritance tax. This does not usually happen as most insurance companies in India ask the policyholder to state a primary beneficiary and a contingent beneficiary. If the primary beneficiary passes away before the policyholder, the other nominee will receive the amount without any tax implications.

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.