Typically, Life insurance payouts are received by the beneficiary when the insurer has died and the nominee has filed a death claim by submitting death certificate along with the application. In this case, entire amount received by the beneficiary is not taxable.
Any amount received by the insurer at the time of maturity of the life insurance policy is also tax exempted. However, payouts received at the time of maturity or surrender has to satisfy certain conditions to get exemption benefits.
In this article, we will discuss when life insurance policy payouts is taxable and when its exempted.
According to Section 10(10D) of the Income tax act, 1961, any sum received i.e. bonus and sum assured, under a life insurance policy on maturity or surrender of the policy or on the death of the insured are not taxable i.e. it’s wholly exempted. However, in following cases sum received will be taxable in the hands of the recipient;
Policy issued after 1.4.2003 but on or before 31.3.2012
Any sum received under a life insurance policy issued after 1.4.2003 but on or before 31.03.2012 in respect of which premium payable in any year during the terms of the policy exceeds 20% of the actual sum assured, then the entire proceeds will be taxable.
Sum assured does not include bonus amount and any premium amount to be returned by the insurance company.
Policy issued on or after 1.4.2012
In case of a life insurance policy issued on or after 1.4.2012, if the premium payable in any year exceeds 10% of the actual sum assured, then the entire proceeds would be taxable in the hands of the insured.
In cases where the insured suffers from severe disability or disease as specified under section 80U and 80DDB respectively of income tax act 1961 and life insurance policy has been issued on or after 1.4.2013, then the above limit of 10% will be increased to 15%.
Any sum received from insurance company on the death of the insured disabled person is also taxable in the year in which it’s received.
Proceeds of Keyman Insurance Policy – is it taxable
Keyman insurance policy means a life insurance policy in the name of the Key employee of an organisation taken by the employer or other authorised person of the organisation. In case of a claim, policy precedes goes to the employer or organisation.
The objective is to cover the life of a Keyman for a monetary value in case of a loss due to his/her death.
As per present tax law, any sum received from a keyman insurance policy is fully taxable. Please remember premium paid by the company or employer for a keyman insurance policy is allowable business expenditure.
In above cases, when the payout is taxable, it has to be added to the total income of the recipient in the year in which its received.
TDS on Insurance Receipts at the time of maturity or termination
As per section 194DA of Income tax act 1961, insurance companies are required to deduct tax at source at the rate of 2% if the sum paid is not exempted under section 10(10D). This means if sum received is exempted under section 10(10D), then TDS will not be deducted.
Under section 194DA, TDS will not be deducted if amount received do not exceed Rs. 1, 00,000.
We suggest you to submit your PAN to insurer as in absence of Permanent Account Number, insurer will deduct TDS amount at the rate of 20% instead of 2% as mentioned above.
If tax has been deducted out of the money received from insurance companies, then the receiver has to include it into his income while filing return of income.
If he is not liable to tax or eligible for refund, then he can claim refund of tax by filing the return of income.
However, as discussed at the beginning of the article, sum received on the death of a person shall be exempted. This means, in case of death of the insured, policy proceeds shall be tax free irrespective of above conditions.
Insurance premium paid to ensure anyone’s life is also tax deductible. This means if you are paying premium amount to ensure your life or ensuring life of spouse and children, then the whole amount paid during the financial year can be claimed as tax deduction within the limit as specified under section 80C of Income Tax Act, 1961. For section 80C deduction, children can be dependent, married or unmarried. You can claim deduction under section 80C from your gross total income if you have paid the premium amount during the financial year.