Life Insurance Premium- Tax benefit on proceeds received on Maturity

Besides the benefit of securing one’s life by taking a life insurance policy, there are tax benefits & income tax exemption on the maturity amount received from the policy provided the premium paid to actual capital sum assured does not exceed the prescribed thresholds provided by Income Tax Act.

Life insurance proceeds received on maturity are exempt from tax

The amount received at the time of maturity of the policy is exempt from tax in the hands of the policyholder. Neither any Income tax nor any TDS is deductible on such amount received.

If an individual receives the maturity amount from a relative, it would be exempt in the hands of the individual if the policy taken by the Individual’s relative was in the Individual’s name.

For example- Mr. A receives Rs.5 lakhs from a relative.  The relative had taken life insurance policy in his name, therefore the  proceeds received by Mr. A would still be exempt from tax.

In the case of death of a person any sum received will be exempt.

How to show the Maturity Proceeds in your income tax return?

The maturity proceeds received by you are exempt under Section 10(10D) and should be shown under exempt income in your income tax return.

If you have not filed the return & confused how to file & show in the income tax return, please follow our link https://cleartax.in/

Here is the screenshot for your easy reference:

Situations when Life Insurance Proceeds may become taxable

The following sums received from a life insurance policy are taxable as ‘Income from other sources’:

  • Any sum received from a policy under section 80DD(under a medical insurance policy)
  • Any sum received under a Keyman Insurance Policy
  • If the premium paid for a policy on or after 01/04/2012 exceeds 10% of the actual sum assured, the entire amount received under such policy shall become taxable*
  • If the premium paid for a policy on or after 01/04/2003 but on or before 31st March,2012 exceeds 20% of the actual sum assured, the entire amount received under such policy shall become taxable

*10% would be replaced by 15% if the premium is paid on or after 01/04/2013 in insuring a life of a person with disability.

Example: Mr. A takes a life insurance policy of a capital sum assured of Rs. 10,00,000. He paid a premium of Rs, 1,50,000 in his name in March,2016. Deduction would be restricted to 10% of capital sum assured i.e. Rs. 1,00,000(10%*10lakhs).  Hence, out of Rs. 1,50,000 premium paid by him, he would be eligible for deduction for only Rs. 1,00,000 & balance Rs. 50,000 would become taxable & included in the total income of Mr. A.

These sums would be added to the total income of the policy holder & become taxable depending on the applicable income tax slabs.

 

TDS on Life Insurance Proceeds

Tax shall be deducted at source (TDS) on payments to Policyholder, which are not exempt under section 10(10D) equals or exceeds Rs. 1 lakh in a financial year. (as per Section 194DA of the income tax act)

  • In case PAN is available and valid, 2% TDS will be applicable*(if payment made before 1st June, 2016).
  • In case PAN is invalid or not available, 20% TDS will be applicable!
  • In case your life insurance policy qualifies for exemption Sec 10(10D), no TDS will be deducted.

*Effective June 1, 2016 the TDS rate has been reduced from 2% to 1%.

However, in the case of death of a person any sum received(including excess premium paid earlier) will be exempt.

Our tax-filing website has comprehensive guides on insurance and other tax-saving deductions

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