ATK
New Delhi [India], March 22: Life insurance is an essential financial tool that provides security while helping you plan for the family’s future. The added advantage of buying a life insurance policy is the tax benefits it offers, making it a smart financial choice. But how does it impact your taxable income in India?
Let’s take a closer look at how life insurance maturity benefits are treated under tax laws, when they are exempt from tax and the conditions under which they may be taxable. Knowing these details can help you plan better and leverage the benefits of your policy.
What is life insurance maturity?
Life insurance maturity refers to the point when your policy completes its term and the insurer pays out the accumulated benefits. This payout, known as the maturity benefit, includes the sum assured along with any bonuses or returns, depending on the type of policy. Unlike a death benefit, which is paid to the nominee in case of the policyholder’s demise, a maturity benefit is given directly to the policyholder if they survive the policy term. In India, the tax treatment of maturity benefits depends on Section 10(10D) of the Income Tax Act. Allow us to take a closer look at how it impacts your taxable income. We will also talk about the things to keep in mind while planning your finances.
Situations when the maturity amount is taxable
There are certain situations where the maturity amount from a life insurance policy is taxable. Here’s a breakdown of when this happens and why:
Keyman Insurance Policies
If the maturity benefit is received from a Keyman Insurance Policy, it is fully taxable. This type of policy is taken by an employer on the life of an employee and the maturity benefit is paid to the employer instead of the employee’s family. Since this is a business-related insurance policy, the payout is treated as business income and is taxed accordingly.
Policies with High Premiums
The tax-free status of maturity benefits depends on how much premium (the amount paid for the insurance policy) you are paying compared to the sum assured (the guaranteed amount you receive at maturity).
For policies issued on or after April 1, 2003: If the premium paid in any year exceeds 20% of the sum assured, the maturity amount becomes taxable.
For policies issued on or after April 1, 2012: This limit is stricter–if the premium exceeds 10% of the sum assured, the payout is taxable.
Policies for Disabled Individuals
If the life insurance policy is taken for a disabled person, the maturity benefit will be taxable if the premium exceeds 15% of the sum assured. This applies to policies where the insured person has a severe disability as defined under tax laws.
Policies Linked to Certain Diseases (Section 80DDB)
If the policyholder has a disease specified under Section 80DDB of the Income Tax Act and the maturity proceeds are linked to their treatment, the payout could be taxable. Section 80DDB provides deductions for medical expenses related to serious illnesses and policies linked to such cases may not always get full tax exemption.
How is the tax applied?
If your maturity amount is taxable, it gets added to your total income and is taxed based on your income tax slab. If you’re wondering how to calculate income tax, it simply means adding up your earnings, checking your tax slab and applying the right percentage.
Before paying you the maturity amount, the insurer will deduct TDS (Tax Deducted at Source) if the payout is over Rs1 lakh and the policy does not qualify for exemption under Section 10(10D).
TDS Rate:
* 5% if you have submitted your PAN Card
* 20% if you haven’t submitted your PAN
If the maturity amount is less than Rs1 lakh, no TDS is deducted, but you are still required to declare this income in your income tax return and pay applicable taxes.
Situations when the maturity amount is not taxable
For most policyholders, the maturity amount from a life insurance policy is completely tax-free, provided certain conditions are met. Here’s when you don’t have to worry about paying tax on your policy’s maturity benefits:
Policies Issued on or After April 1, 2012
If your policy was issued on or after April 1, 2012, the premium you pay in any year should not exceed 10% of the sum assured. If it stays within this limit, the maturity amount will be completely tax-free.
Policies Issued on or After April 1, 2003
For policies issued between April 1, 2003 and March 31, 2012, the premium should not exceed 20% of the sum assured. As long as this condition is met, the maturity amount is exempt from tax.
Policies for Disabled Individuals
If the policy is taken for a person with a disability, the premium should not be more than 15% of the sum assured. If it stays within this limit, the maturity benefit remains tax-free.
Finishing up
With this knowledge, you can do more than just protect your family–you can plan your finances better. Life insurance not only provides security but also offers tax benefits. However, not all maturity payouts are tax-free. Hence, understanding when they are taxable and how to calculate income tax is important. It helps you stay prepared and make informed decisions. Thus, avoiding unexpected tax deductions and maximising the benefits of your policy.
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