Income Tax: Here's how life insurance policies are taxed in India

Live Mint

Life insurance is one of the most sought-after options chosen by people as part of financial planning. While the primary purpose of a life insurance policy is to provide your family financial assistance in case of an untimely death, it also helps in wealth accumulation. But is the sum assured received on maturity or after the death of policyholder taxable? Let's find out:

As per Section 10(10D) of the Income Tax Act, 1961, death benefits are always tax-free. Maturity benefits, however, are taxed based on the premiums.

The maturity amount from traditional policies is made up of two parts: The sum assured and the total of bonuses accrued (in a with-profit plan) over the policy period.

This means that you must segregate the sum assured from the annual bonuses declared on the amount during all these years.

As per Section 10(10D), the sum assured amount received on maturity is completely free of tax. Alongside, the bonuses received with the sum assured are also exempt under this section. 

However, one must keep this in mind: You gain tax exemption on policies issued after April 01, 2012, provided the total premiums paid do not exceed 10 percent of the policy sum assured. However, if the policies were issued before April 01, 2012, the sum assured would be free of any tax implications if the total premiums do not exceed 20 percent of the assured amount.

To avail of tax relief under Section 80C of the Act, the life insurance policies must meet similar conditions. 

However, the tax implications for Unit Linked Insurance Plans (ULIPs) are starkly different. As per the tax regulations announced under Budget 2021, for ULIPs with yearly premiums up to ₹2.5 lakh issued on or after February 01, 2021, the return on maturity would be treated as capital gains and would be taxed under Section 112A of the Act.