When is Life Insurance Taxable?

The question “is life insurance taxable?” is very important question at this point of time because life insurance policies are very popular among people in India. According to the latest data 3.5 % Indians have ,as per one estimate , life insurance policies. Remember , only 2 % Indians file tax return.

Therefore , any tweak in the tax laws related to life insurance may affect a very large population.Finance Act 2023 tweaked section 10(10D) and added another conditions that may withdraw exemption on life insurance maturity receipts. The risk of bing taxed on receipt of life insurance amount has gone up considerable.

Life Insurance Taxable If Premium Exceeds a Limit.

The rule that withdraws exemption is based on quantum of premium. So here are the limit of premium in any one year during the period in which policy is in force :

1. If the Life Insurance Policy was issued between 1st April 2003 & 31/03/2012, the premium payable for any of the years during the policy term exceeds twenty per cent of the actual capital sum assured.
2. If Life Insurance Policy was issued after  31/03/2012 and the premium payable for any of the years during the policy term exceeds ten per cent of the actual capital sum assured.

Remember, if the exemption is lost, that means your premium amount for which tax deduction u/s 80C was claimed will also be added to the year of insurance proceeds. This is provided in section 80C(3) of the Income Tax Act. 

What is the meaning of Capital Sum Assured ?

The limit is based on percentage of capital sum assured , so we need to understand what does it mean ? Section 80C(3) provides the answer as under :

“actual capital sum assured” in relation to a life insurance policy shall mean the minimum amount assured under the policy on happening of the insured event at any time during the term of the policy, not taking into account—

  (i) the value of any premium agreed to be returned; or

 (ii) any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.

Exceptions to The Rule That Withdraws Exemption

There are three exceptions to the aforesaid rule. 

1. If the sum is received on the policyholder’s death, sums received will be exempt from tax.
2. If the policy was issued on or after the 1st day of April 2013 and the policyholder satisfies disability conditions as given in sections 80U and 80DD, the maximum premium can be up to 15% of the total sum for claiming tax exemption of insurance receipts.
3. Up to 31st January 2021, Unit Linked Insurance Plan (ULIP ) is not covered in the rules above about the premium limit. It means receipt from ULIP issued before 1st February 2021 is tax-free, regardless of the premium.

ULIP Issued after 31st January 2021

Sums received under a Unit Linked Insurance Policy (ULIP) issued from1st February 2021 are tax-exempt only if the amount of premium payable for any of the previous years during the term of such policy exceeds two lahks and fifty thousand rupees of that policy. 

Insurance policy issued after 31st March 2023 other than ULIP .

Life insurance policy, other than a unit-linked insurance policy, issued on or after the 1st day of April 2023, will lose the exemption if the premium paid is more than 5 Lakh.

Any sum received under a Keyman insurance policy is always taxable ?

If you ask, “What is keyman insurance policy?” let me provide a summary answer. Some employees become an asset for a company to the extent that the company visualise that the employee dies, the company’s profit may go down and finding his replacement of experience, and calibre will not be easy.

So, the employer acts as the proposer and premium payer for an insurance policy on the life of such an employee. If the employee dies, a substantial sum assured is paid to the company. This amount is generally significant enough to overcome any business downturn and recruit a new senior executive. In the event that the insured person survives the insurance term, no payout is made to the company. 

The amount received by the company is a taxable receipt in the hand of the company.

What about life insurance tax deduction at source ?

Life insurance tax deduction law is provided under section 194DA of th Income Tax Act . The first person who will scrutinize the payments of life insurance is the company that issued you policy ! They are bound to deduct tax at source as per section 194DA if the payments in relation to a life insurance policy exceeds Rs 1 lakh.

I hope you got the complete answer to the question “is life insurance taxable?”