Learn How Life Insurance Policies are Taxed: Income Tax Calculator

Having a life insurance policy is imperative in today’s times. It secures the financial future of your loved ones and ensures that they continue to live peacefully even if you’re not there with them in the future. If you’re the sole breadwinner of your family, buying a life insurance policy becomes even more critical.

If you want a pure protection plan without any maturity benefits, you can purchase a term life insurance plan. In the case of a term plan, a lump sum will be provided to your family in the event of your unfortunate death during the policy period.

On the other hand, if you want the return on premiums on maturity along with the death benefits, you can opt for an endowment plan.

Taxation Rules for Life Insurance Policies

This is a common question that worries several policyholders or prospective life insurance policy buyers. They don’t know if the benefits received from a term plan or an endowment would be taxable or not. And if they are taxable, then at what rates? Let us clear the clouds around this.

While the general impression is that the proceeds from a life insurance policy are completely tax-free, however, this is subject to certain terms and conditions as mentioned in the Income Tax Act of 1961. You must know these exceptions so that you or your family members can make the most out of a life insurance policy.

• Section 10 (10D) of the Income Tax Act

  As per section 10 (10D) of the Income Tax Act of 1961, the death benefits or maturity amount received through a life insurance policy along with the accrued bonuses (if any) are completely tax-free in the hands of the receiver subject to certain terms and conditions.
  
  The policy proceeds are tax-free under the following conditions:

  • If a life insurance policy is issued between the 1st of April 2003 to the 31st of March 2012, the annual premiums payable should not exceed 20% of the actual sum assured of the policy. As per the explanation under section 80C (3A), the actual sum assured refers to the least sum assured during the entire policy period without including any bonuses.
  • If a life insurance policy is issued on or after the 1st of April 2012, the annual premiums should not exceed 10% of the actual sum assured.
  • In the case of a life insurance policy taken for a person suffering from a disease or disability as specified under sections 80U and 80DDB, respectively, the annual premiums should not exceed 15% of the actual sum assured.

In case the annual premiums exceed the above-mentioned percentages, i.e., 10%, 15%, or 20% of the sum assured, in any year during the policy period, the maturity benefits of policy proceeds would become taxable. They would be added to the policyholder’s taxable income and will be taxed as per the applicable income tax rate. You can use an online income tax calculator to determine the taxes on your policy proceeds in such a case.

However, if the policyholder dies during the policy term, the death benefits received by the nominee would be completely tax-free, irrespective of the premium amount.

• TDS applicable to life insurance policies

  If the maturity amount of a life insurance policy is more than ₹1 lakh and the policy proceeds don’t qualify for tax exemptions under section 10 (10D) of the Income Tax Act, a TDS of 2% would be deducted from the payment. The policyholder can claim the refund of this TDS amount if his or her annual income doesn’t exceed ₹5 lakhs (as per the new tax regime) while filing their income tax returns.

To conclude: 

Life insurance policy proceeds are completely tax-free, albeit with some terms and conditions. Besides, the policyholder can also avail of tax deductions of up to ₹1.5 lakhs every year under section 80C for paying life insurance premiums.

With PNB Metlife, you can get a suitable life insurance policy for the financial security of your loved ones. Browse and apply for the best plan as per your requirements. You can also calculate the income tax using the income tax calculator.