In India, the maturity benefit of a life insurance policy is generally tax-exempt under Section 10(10D) of the Income Tax Act, provided certain conditions are met. Here are the details regarding the taxability of life insurance maturity proceeds:
1. Section 10(10D) – Tax Exemption on Maturity Benefits
- Under Section 10(10D), any sum received on maturity, including bonus (if applicable), is tax-free.
- This exemption applies to various types of life insurance policies, including endowment plans, whole life insurance, and Unit-Linked Insurance Plans (ULIPs).
2. Conditions for Exemption Under Section 10(10D)
For the maturity proceeds to be tax-free, your policy must meet specific conditions:
- Premium-to-Sum Assured Ratio:
- For policies issued before April 1, 2012, the premium paid in any year should not exceed 20% of the sum assured.
- For policies issued on or after April 1, 2012, the premium paid in any year should not exceed 10% of the sum assured.
- For policies issued on or after April 1, 2013 for disabled individuals under Section 80U or for those with specific diseases under Section 80DDB, the premium should not exceed 15% of the sum assured.
- Sum Assured Defined: The sum assured typically refers to the minimum guaranteed amount payable on death or maturity.
If your policy meets these conditions, the maturity amount is entirely tax-free.
3. Exceptions to Tax Exemption
If the policy does not meet the above premium-to-sum assured criteria, the maturity benefit will not be eligible for exemption under Section 10(10D). In such cases:
- The maturity benefit is added to your gross total income and taxed as per your income tax slab.
- TDS (Tax Deducted at Source): If the maturity proceeds exceed ₹1 lakh, the insurance company deducts TDS at 5% on the income component of the maturity amount if your PAN is on record. If your PAN is not available, TDS is 20%.
4. ULIPs – Special Conditions (Post-2021 Policies)
- For ULIPs purchased on or after February 1, 2021, if the annual premium exceeds ₹2.5 lakh, the policy’s maturity benefits will be taxable as capital gains.
- If the premium is within ₹2.5 lakh annually, the maturity proceeds continue to be tax-exempt under Section 10(10D).
5. Illustrative Example
Example 1: Rakesh bought an endowment policy in 2018 with a sum assured of ₹10 lakhs and an annual premium of ₹90,000 (9% of the sum assured). When his policy matures, the entire maturity amount, including any bonuses, will be tax-free under Section 10(10D).
Example 2: Sita bought a ULIP in 2022 with an annual premium of ₹3 lakh (exceeding the ₹2.5 lakh threshold). Since her policy doesn’t meet the criteria for tax exemption, her maturity proceeds will be subject to capital gains tax.
6. Death Benefits
- The death benefit paid to the nominee is fully tax-exempt under Section 10(10D), regardless of the premium amount, policy type, or sum assured.
Conclusion
In summary, life insurance maturity benefits are tax-free under Section 10(10D), provided the policy meets specific criteria regarding the premium-to-sum assured ratio or the ULIP premium threshold. If these conditions are not met, the maturity proceeds are taxable, either as income or capital gains, depending on the policy type.
Post a Comment