EducationTaxability Of Life Insurance Policy Payouts

Taxability Of Life Insurance Policy Payouts

People frequently purchase endowment and ULIP plans in a hurry in order to fulfil the targets of tax and saving restrictions. Although choosing an investing-plus-insurance plan may be advantageous for you, it is always beneficial to separate your investment, and insurance needs if you want to maximise your tax benefits.

Life insurance premium which is tax deductible?

According to section 80C of the Income Tax Act, any sum paid by the insured as a premium for life insurance for themselves, their spouse, or their children is eligible for life insurance tax benefits. However, the policyholder cannot claim a tax credit for the premium they paid for their siblings, parents, or in-laws. There is a tax benefit of up to Rs. 1.5 lakh available under Section 80C of the Income Tax Act. Additionally, the promised amount is tax-free in the receiver’s possession. The insured should be aware that because you are only investing once with this policy, you can take advantage of the tax benefit only once.

Section 10 (10) D of the Income Tax Act, 1961

The maturity funds or sum promised on policy maturity plus any bonus, are tax-free under section 10(10) D of the Income Tax Act of 1961. According to this clause, the death benefit given to the beneficiary is entirely tax-free under certain conditions, whether the insured surrenders the policy or the policyholder passes away.

The proceeds of the policy are taxable to the policyholder in the following circumstances:

  • If the premium paid in any year exceeds 20% of the actual sum assured and the life insurance policy was issued after 01.04.2003 but before 31.01.2003, the policy proceeds will be taxable under section 10(10)D. The actual sum assured has been defined in section 80C(3A) as the least sum assured during all policy years, omitting the bonus payment that is payable over the insured amount.
  • If the policy is issued after April 1, 2012, the 20% premium payment cap becomes 10%.
  • If the life insurance policy is issued after 01.04.2013, the 10% of the maximum is increased to 15% in the event that the policyholder contracts a serious illness or has a severe disability under the applicable sections of the Income Tax Act. Only if the handicap falls under a certain section, such as 80U, and the serious illness falls under section 80DDB, is the tax advantage eligible.
  • The entire policy proceeds will be taxed in the year of receipt if the premium paid in any given year is greater than the designated proportion, such as 10%, 15%, or 20% of the actual sum assured. However, in the event of the policyholder’s passing, in the event that the beneficiary receives the amount of the sum assured, the same insurance proceeds will be tax-free even if the premiums paid in any given year exceed the designated percentage of the Sum assured.

The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.

Why insurance policies are better for taxes?

Because of their advantages, term insurance plans and life insurance plan are more tax advantageous. The sum assured is typically very high and multiplies the annual premium in term insurance plans. You can make use of a life insurance calculator to check on the approximate cost of premiums.

According to IRDAI regulations, if a person under the age of 45 purchases a life insurance policy with a ten-year term, the sum assured will be equal to ten times the yearly premium. The insured will, therefore, undoubtedly obtain the tax benefit. On the other hand, the minimum sum assured will be restricted if the buyer is above 45 and the policy’s duration is less than ten years. The insured could forfeit the tax benefit in this situation. Visit the official website of IRDAI for further details.

Many insurers offered specialised plans that let the insured pick the amount of insurance. Therefore, if you wish to receive life insurance tax benefits, you can choose the sum assured based on your preferences.


The tax structure of any financial instrument should be taken into consideration before purchase. A life insurance calculator is a tool you may use online to determine the amount of coverage required based on your needs. However, buying insurance coverage only to avoid paying taxes is never a good idea.

It’s crucial to realise that a life insurance plan necessitates a long-term commitment because the yearly premium must be paid. Therefore, before choosing a policy, it is crucial to note its major characteristics and determine which tax band it falls into.

Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale best mutual funds.

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