One of the simplest ways to ensure that your family will continue to be financially secure and self-sufficient even when you can no longer care for them is to get a life insurance. When the policyholder passes away unexpectedly while the life insurance policy is in effect, the insurance company pays the nominees a predetermined amount of money, known as the death benefit. The nominees are then free to put this payment to whatever use they want.
Would life insurance earnings be taxable in the recipient’s hands, nevertheless, given that the payout as received by the beneficiary frequently comes in the form of a lump sum? If you’ve been wondering about the answer to this question for a while, here it is.
Is the cost of life insurance tax deductible?
First off, life insurance has a number of tax advantages, one of which is the opportunity to deduct the premiums you pay for life insurance from your overall income.
Subject to the limitations set forth in section 80C of the Income Tax Act of 1961 (the “Act”), a policyholder may deduct the amount of the premiums paid for a life insurance policy up to Rs. 1.5 lakhs from their annual gross income. This enables the insured to significantly lower his or her annual income tax obligation.
Not only that. Additionally, policyholders may take advantage of a deduction under Section 80D of the Act. For instance, under the Act’s provisions, a life insurance policyholder who also selected a critical illness rider would be qualified to deduct the rider premium, up to a maximum of Rs. 25,000 per year, from his total income.
In conclusion, life insurance premiums are deducted from income for tax purposes and offer life insurance tax benefits.
The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.
Does the life insurance policyholder’s nominee have to pay taxes?
Nowadays, many life insurance policies include maturity benefits that, in the event that the policyholder lives to the end of the policy term, are paid to them directly. So, will the policyholder be required to pay taxes on the proceeds of the maturity?
The proceeds of a life insurance policy in the recipient’s possession are exempt from taxation under Section 10(10D) of the Act, provided that the following conditions are met:
- If the annual premium that the policyholder must pay is less than 20% of the sum assured and the life insurance plan was issued on or after 01.04.2003 but before 31.03.2012.
- If the annual premium that the policyholder must pay is less than 10% of the amount assured and the life insurance plan was issued on or after April 1, 2012.
The life insurance proceeds, on the other hand, are taxable in the hands of the recipient if the yearly premium in either of the two scenarios above exceeds 20% or 10%, respectively.
What about death benefits, then? In the hands of the life insurance nominee, are they also taxed?
The sum assured under the policy is now paid out to the nominee named under the plan as a death benefit when the policyholder passes away during the policy term. Given that the insured is no longer alive, the insurance beneficiary, in this case, is the nominee.
However, section 10(10D) of the Act specifically says that, in this circumstance, all life insurance tax benefits received from a policy would not be subject to any taxes at all, with the exception of keyman policies. Despite this, the nominee who receives the benefit must still include the receipt in his income tax return (ITR).
The additional benefit of term insurance policies
Contrary to other life insurance policies, term insurance does not provide any maturity benefits. It exclusively offers death benefits instead. Therefore, unless the policyholder chooses a term insurance with a Return of Premium option, a term insurance policyholder who lives to the end of the term will not be able to receive any payout. Use a life insurance calculator to know the approximate costs of your investment.
However, since these plans don’t offer any rewards at maturity, term insurance policies typically have very low premiums. In reality, of all types of life insurance, term insurance rates are the least expensive.
The same tax advantages that apply to traditional life insurance plans also apply to term insurance contracts.
As you can see, life insurance is not taxed unless the annual premiums are beyond the established limits. Having said that, don’t buy a life insurance policy just for the sake of saving money on taxes. The life insurance calculator is easy to use and is quite beneficial if you want to buy a term insurance policy. Other advantages include helping you safeguard your family’s financial future in the event of unfavourable events.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.