Taxation of Term Insurance - Is the Claim Amount Taxable?
Many individuals might choose a term insurance policy to safeguard their family’s financial well-being if they’re not around. The monetary assistance provided by such a policy can assist your loved ones in managing financial responsibilities, everyday expenses, educational needs, and future planning, even in your absence.
For individuals who serve as the primary income earner for their families, a term insurance policy can alleviate concerns about their family’s financial stability. However, prior to acquiring a term plan, it’s vital to grasp how the monetary compensation, known as the sum assured amount, offered by the policy might be subject to taxation. You might be pondering whether term insurance claim payouts are taxable.
Section 10 (10D) of the Income Tax Act of 1961 grants tax exemption on life insurance proceeds, contingent upon meeting specified terms and conditions. We’ll delve into the tax implications of insurance claim payments received upon death and other occurrences, as well as explore additional tax advantages associated with term insurance.
Tax on Term Insurance Claim Payouts [1][2]
Before we explore whether a term insurance claim is subject to taxation, it’s crucial to recognize that term insurance mainly belongs to the ‘pure protection’ category. Pure-term insurance policies usually only offer a payout if the policyholder or life assured passes away. Most term insurance plans do not incorporate a savings or investment feature.
Certain term insurance plans might include a ‘return of premium’ (ROP) option, where the policyholder or life assured gets back all premiums paid if they outlive the policy’s term. Alongside the death benefit payout, the maturity benefit sum may also influence the taxation of term insurance claim amounts.
Below are key points outlining the taxation of insurance claim payouts received upon the demise of the policyholder or the maturity of the policy:
- The amount received as the death benefit payout by the nominee(s) upon the demise of the life assured may qualify for tax exemption under Section 10 (10D) of the Income Tax Act, 1961 (referred to as ‘the Act’).
- Section 10 (10D) might also entail a tax exemption on the maturity benefits of the scheme, contingent upon the stipulations outlined in the legislation.
- In order to qualify for this tax advantage on term insurance payouts, the premium for the term insurance policy must not exceed 10% of the death benefit if the policy was bought after April 1st, 2012.
- Should the plan be acquired before April 1st, 2012, the claim amount must not exceed 20% of the death benefit to qualify for this tax exemption.
- Ensuring timely premium payments and maintaining an active policy are also necessary to qualify for this tax exemption on term insurance claim amounts.
- In addition to the tax exemption provided under Section 10 (10D), a term insurance policyholder might be eligible for other tax benefits.
- Starting from April 1, 2023, if the combined annual premium for traditional policies, including term insurance policies, exceeds Rs. 5 lakhs, any income derived from such policies is subject to taxation. However, the death benefit from such policies remains tax-free for the recipient. If the Return of Premium (ROP) option is chosen, the gains from the policy upon maturity will be taxable for the recipient.
What other tax advantages does a Term Insurance Plan offer?
Having clarified the tax implications of a term insurance claim amount and the circumstances under which it may be taxable, let’s explore additional tax advantages associated with term insurance:
- Under the Income Tax Act of 1961, Sections 80C and 80D may provide tax benefits for term insurance by allowing a deduction from total income equivalent to the premiums paid for term insurance, within the limits specified in the respective sections under the old tax regime.
- Under Section 80C, individuals can claim deductions of up to Rs 1.5 lakhs within a financial year by utilizing premiums paid for a term plan.
- The terms and conditions governing Section 80C tax deductions align with those concerning the taxability of insurance claim amounts received upon death and maturity of the policy. Therefore, for plans purchased after April 1, 2012, the annual premium must not exceed 10% of the death sum assured. For policies acquired before this date, the premium should fall within the limit of 20% of the death sum assured.
- Section 10 (10D) addresses the taxation of insurance claim proceeds received upon death and maturity, whereas Section 80D offers tax advantages for health insurance coverage.
- Should you choose to include a health-related rider like a critical illness rider alongside your primary term plan, you could potentially qualify for tax deductions under Section 80D, amounting to Rs 25,000 if the insured individual is under 60 years old. This deduction limit may rise to Rs 50,000 for individuals aged 60 years and above.
It’s important to note that tax benefits under Section 80C and Section 80D are applicable exclusively under the old tax regime.
Conclusion
Term insurance offers the potential to secure a brighter financial future for your family in the event of an unforeseen circumstance. Additionally, you may enjoy significant tax advantages, such as tax exemption on the term insurance claim amount under Section 10 (10D) of the Income Tax Act of 1961, provided the conditions outlined in section 10(10D) are met. Furthermore, Section 80C and Section 80D may afford tax deductions up to Rs 1.5 lakhs and Rs 50,000 respectively, subject to the provisions specified within.