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Tax Exemption on Life Insurance Policy under Section 10 (10D)

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life-insurance

The Income Tax Act, 1961 offers a number of deductions to individual taxpayers. In addition to the exemption of the premium amount paid for life insurance under Section 80C, it offers a benefit under section 10 (10D) for maturity returns. According to Section 10 (10D), the sum assured received in a life insurance policy is exempt from tax.

It is important to understand the exemptions on the tax on surrender of life insurance policy. The rule is not applicable for an amount received under a Keyman Insurance Policy or under Section 80 DD(3) or 80 DDA(3). Additionally, the rule does not apply to any sum that is received other than as a death benefit under the policy issued after April 1, 2012, and if the amount of premium paid in any year exceeds 10% of the sum assured.

Example

For instance, Aisha has a life insurance policy of INR 50 lakh and she has paid a premium of INR 25 lakh, INR 10 lakh, INR 10 lakh, and INR 5 lakh over the tenure of the policy. During maturity of the policy, she receives a sum of INR 58 lakh.

Tax treatment

 This exemption is not applicable to Aisha because the premium amount paid is more than 10% of the sum assured. Hence, the lump sum received on the policy including the premium amount paid will be taxable. An amount of INR 8 lakh will be subject to tax under Section 10 (10D) of the Income Tax Act, 1961.

TDS on life insurance policy maturity amount

 Many taxpayers used to avoid paying tax by hiding the maturity amount in their income tax return. To deal with this scenario, the Finance Minister introduced a separate section-194DA in Budget 2014, wherein a Tax Deducted at Source (TDS) of 2% will be applicable. This was further changed to 1% in Budget 2016. This amount will be deducted by the insurance provider on the lump sum received from the insurance company if the premium amount paid is more than 10% of the sum assured in any year. The TDS will be applicable on the full amount, including bonus. If the policyholder does not provide a PAN card, a TDS of 20% is applicable on the maturity amount. TDS will not be applicable on any amount received below INR 1 lakh.

The sum received on the death of the policyholder will remain tax-free. Before you invest in a life insurance policy, it is important to understand the tax implication of the same. Policyholders not only receive a tax benefit on the premium amount paid but also enjoy a deduction on the maturity amount. It is essential to remember the exemption related to the clause to understand tax planning. All death benefits will remain tax-free. However, there will be a tax implication on maturity benefits if the premium amount paid is higher than the set limit.

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