Is your life insurance payout taxable? Here's the truth
What's the story
Imagine getting a life insurance payout and finding out you owe taxes on it—surprising, right? In India, not all life insurance benefits are tax-free. While life insurance is often seen as a safety net, how much of it you actually pocket depends on tax laws that many overlook. From Section 10(10D) exemptions to the impact of maturity proceeds, here's a breakdown to help you stay ahead and make the most of your policy returns.
Exemption criteria
Exemption under Section 10(10D)
Life insurance policy payouts are typically tax-free under Section 10(10D) of the Income Tax Act, as long as certain criteria are fulfilled. For policies issued after April 1, 2012, if the premium exceeds 10% of the sum assured in any year, the maturity proceeds become taxable. For policies issued before this date, the limit is 20%.
Taxable proceeds
Taxation when exemption doesn't apply
If a life insurance payout is not exempt under Section 10(10D), it gets included in the recipient's income and is taxed as per their applicable income tax slab rates. This usually occurs when premiums exceed the stipulated percentage of sum assured or for certain types of policies like ULIPs not fulfilling specific conditions.
TDS deduction
TDS on life insurance payouts
An important thing to remember is that insurers will deduct a 5% TDS (Tax Deducted at Source) on non-exempt policy payouts exceeding ₹100,000. But, this does not imply that your tax liability is fully discharged. You may need to pay more tax or can claim a refund, depending on your total income and slab rate.
Premium deduction benefits
Deductions for premium paid
Premiums paid for life insurance policies qualify for tax benefits under Section 80C of the Income Tax Act. An individual can claim deductions up to ₹1.5 lakh per annum for premiums paid for life insurance for self, spouse, and children. This deduction falls within the overall limit under Section 80C, which includes other investments such as ELSS funds and PPF accounts.
Investment strategy
Key considerations before investing
When selecting a life insurance policy with the intention of optimizing post-tax returns, it's important to take into account factors like the ratio of premium amounts to sum assured and the type of policy you choose (traditional plan vs ULIP). By grasping these intricacies, you can ensure you're not only optimizing your investment but also providing financial protection to your loved ones.