Is Maturity Benefit in Life insurance Tax-Free?

Life insurance policies are referred to as one of the significant ways to make sure that your life is insured in any undesired circumstances such as health disability, unemployment, accidents or even death. And with the inclusion of new amendments in provision of Income Tax Act, you can not only  secure the financial requisites of your family but also you can get benefitted with tax exemptions on life insurance policies.

Know about the maturity benefits of your term insurance

It is a common notion among us that the benefit amount received during the maturity of all life insurance policies in tax-free always. But the catch is not all the life insurance policies are subjected to tax exemption on maturity however exceptions are still there. In order to avail the tax benefits on a life insurance policy, the policy holder must match up to the below-mentioned criteria.  

What is Maturity Benefit

Maturity benefits simply refers to the amount received by the policyholder once a policy matures. A defined sum is settled with the policyholder by the insurance companies which is liable to be withdrawn when policy matures.

However, to avail the distinctive maturity benefits, one needs to match up with the basic continuation of a policy and its completion to the exact term mentioned under the contract. In most of the cases, the amount to be received at maturity is the multiple of premium paid during the time policy was active plus some added benefits, if given by the insurance company to the client.

The basic eligibility of a policy subjected to maturity benefits is that it should remain active throughout the term. Some key maturity benefits received from a life insurance policies are mentioned here:

  • Basic sum (as mentioned during the policy activation)
  • Accrued additions (if any)
  • Reversionary divident (if any)
  • Terminal bonus (if applicable)

Tax Considerations When You Get Life Insurance

To escalate the involvement and usage of life insurance policies among citizens, major government bodies are emphasizing on introducing forms like Section 10(10D) and 80C under Income Tax Act. Section 10(10D) offers options to the clients so they can easily claim the tax exemption on the amount which is to be received for life insurance. There are few conditions that have been levied on this tax exemption, notified below.

  • Any life insurance policy which is issued after 1st April, 2003 upto 31st March, 2012 and the yearly payable premium is more than 20% of the  “Actual Sum Assured”, then the received sum will come under the ambit of that year in which the policy holder is ought to receive the payout. Here “Actual Sum Assured” refers to the minimum amount which is guaranteed to be given to the policy holder in all policy years (excluding bonuses and premiums that can be claimed).
  • Policies issued after 1st April, 2012 are subjected to the above condition but with different requisites. First the payable premium gets to 10% of the actual sum assured. Secondly, the policy holder if is entirely or severly disabled and suffering from chronic dieseases is subjected to the limit of 15%.
  • If the insurance policy holder has died and the legal nominees are seeking the maturity benefits, then above clauses are not applicable in that case. Instead for nominees, the whole sum is exempted from tax.
  • Proceeds are taxable for policy holders who were part of Keyman insurance policy. The keyman insurance policy refers to the one where in the policy is taken by an indiviudal on behalf of someone else’s life.

If in case the policy proceeds is not liable for tax exemption under Section 10(10D) and the PAN details of an individual is registered with the insurer, then s/he will have to pay TDS at the rate of 2% of the sum to be received by them.

Hoewever, the tax is only payable if the received amount exceeds Rs. 1 lakh. In case the PAN details are not registered, then 20% of the amount is taken as the tax.

Maturity Benefit When Premium is Skipped

One of the common and majorly asked question while getting life insurance is that if in case the premium is skipped for once and is then combined to be paid next year making the insurance premium paid to be 20% of the assured sum limit. Will the maturity benefit still remain tax free or would the maturity benefit on life insurance be taxable?

According to the Section 10(10D), the maturity benefits remain non-taxable as long as the payable premium is less than 20% of assured sum during any financial year. This means it is the payable premium that matters instead of paid premium and thus paying two premiums together in a year doesn’t adds up to an increase in premium to be paid. For example, if the sum assured is Rs 100000 and the premium to be paid is below Rs 20,000, then maturity benefit on life insurance policy is exempted from tax.

Read our article “Why Is Life Insurance Necessary for Life?” for understanding more about Life Insurance.

Finally, the new guidelines of ULIP states that no policy can be withdrawn or surrendered completely before 5years. Also, the norms relating to tax-free maturity benefits have now been changed for good. So, relax and purchase life insurance plan of your choice.

Harjot Singh Narula

Harjot Narula is founder and CEO of ComparePolicy.com, an IRDAI approved insurance web aggregator focussed on selling online insurance for companies. Harjot has more than a decade of experience in software development and has also spent 5 years in US working for the mortgage and risk management industry.

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