Life Insurance Income Tax Exemption
Life Insurance Income Tax Exemption
Income received from the settlement of a life insurance policy is exempted from taxability under Section 10(10D) of the Income Tax Act. In this article, we briefly discuss the life insurance income tax exemption for any amount received under a life insurance policy, including the bonus amount allocated.
Section 10(10D) of Income Tax
Under Section 10(10D) of the Income Tax Act, the amount invested and the amount received as proceeds from Life Insurance is exempt from Income Tax. Thus, any sum received on maturity of a life insurance policy or death benefits is tax-free. Also, Life Insurance is not subjected to TDS (Tax Deducted at Source) making it an ideal tool for saving taxes.
Insurance Terms at a Glance
Before learning Life Insurance Income Tax Exemption we should familiarise with some important terms of the insurance policy.
Life Insurance Premium Policy
Premium is an amount paid by a person to the insurance company to get a policy.
Single Premium Policy
To get a single premium policy the person need to pay one lump-sum amount.
Sum assured is the guaranteed amount received by a policyholder.
Bonus is the amount given to policyholders in addition to the sum assured.
Maturity value is the amount the paid to the policyholder when the policy matures. Maturity value includes the sum assured and the bonuses.
Eligibility for Life Insurance Tax Exemption
Eligible condition to get benefits under section 10(10D) is as follows:
- Any Individual who is receiving the amount from a Life Insurance Policy is eligible to get tax benefits under Section 10(10D).
- If a Person received a policy on or after 1.04.2003, he will get tax exemption only if the amount of premium paid on the policy does not exceed 20% of sum assured in any financial year.
- Policy issued on or after 2012 will get tax exemption only if the premium paid in any financial years during this policy does not exceed 10% of the Actual Capital Sum Assured.
- As per Finance Act 2013, Policies taken by a disabled person as per section 80U or by a person suffering from disease as per section 80DDB will get tax exemption only if the premium paid does not exceed 15% of sum assured in any financial year.
Section 80U of Income Tax Act – Income Tax for
An individual who is resident of India during the financial year can claim income tax deduction under Section 80U if the person is suffering from a physical disability.
Section 80DDB of Income Tax Act
An Individual can get tax benefits under Section 80DDB, for treatment of certain specific diseases.
Ineligibility for Life Insurance Tax Benefits
Ineligibility conditions under Life Insurance benefits under section 10 (10D) are listed below.
- Sum received under Keyman Insurance Policy
- Amount received under Section 80DD or section 80DDA
- Amount received on the death of the person will continue to be exempt without any condition.
- Sum received from the Foreign Life insurance company
Keyman Insurance Policy
Under Keyman insurance policy the life of a Key Employee (Keyman) to be insured. Keyman is a person employed by a firm having special skill sets and substantial responsibilities. The proposer and the premium payer of this insurance is the employer, employee life to be insured and the benefit of a claim goes to the employer. Directors of a Company, Key Sales People, Key Project Managers and People with Specific Skills can be a Keyman.
Health insurance tax deductions are offered under Section 80D of the Income Tax Act, 1961. Under this section, deductions are provided on the policies for Individual and his dependents such as spouse, children and parents.
Under section 80DDA of the Income-tax Act, while computing the total income of an individual or a Hindu undivided family, an amount of less than Rs.20 000 was paid or deposited in the last year out of the income is chargeable to tax.
If the maturity benefit of life insurance policy is not exempt under section 10(10D), the sum received from such Policy will be subjected to Tax Deducted at Source (TDS). As per Section 194DA of the Act, TDS will be deducted while making the payments if the total amount exceeds 1 lakh rupees.
- If PAN is submitted 1% TDS on total Maturity amount is applicable
- If PAN is not submitted 20% TDS on the total maturity amount
Taxpayers should note that the TDS rate on a life insurance policy has been reduced from 2% to 1%, effective from 1st June 2016.