Tax Benefits on Life Insurance Policies

Life insurance policies offer not only a maturity/death benefit but also tax deductions under Section 80C and Section 10(10D) of the Income Tax Act, of 1961.

Section 80 C

Any resident or non-resident individual can claim a deduction for the life insurance premium paid under Section 80 C up to ₹1.50 lakh every year. This deduction is available along with other eligible items like PPF, NSC, ELSS, fixed deposits, home loan repayment, tuition fee paid, provident fund contribution etc.

You can only claim an 80C exemption for life insurance premiums upto 10% of the sum assured. For any premium paid over 10%, the deduction is not available. However, for certain individuals who are classified as handicapped persons or suffering from critical illness, upto 15% of the sum insured is exempt, capped at INR 1.5 lakh per year.

Section 10 (10D)

Section 10 (10D) of the Income-tax Act decides whether the maturity proceeds of your life insurance policy will be tax-free or not. Section 10(10D) is applicable to any amount paid out under the insurance plan; whether it is a death benefit, maturation of the plan, or other bonuses.

An important thing to remember is that death benefits are always tax-free. Maturity benefits (paid on survival for a certain time period) are sometimes taxed, based on the premium paid.

For Life insurance plans bought after April 1, 2012, according to section 10 (10D), if the annual premium paid is more than 10% of the sum assured of the policy, the maturity proceeds (survival benefits) would be taxed, according to your income tax slab. If not, then the proceeds are tax-free.

Eligibility Criteria for Section 10(10D) of the Income Tax Act

1. Tax deductions under Section 10(10D) are available for life insurance claim payouts such as death benefits and maturity benefits, including accrued bonuses.
2. Tax deductions under Section 10(10D) are applicable to all types of life insurance claim payouts.
3. There is no upper limit applicable to the tax benefits available under Section 10(10D) of the Income Tax Act.
4. Deductions are applicable to both foreign as well as Indian life insurance companies.

ULIP taxation

The benefits of section 10(10D) also apply to any gains accruing out of Unit-Linked Insurance Plans (ULIPs), and Single Premium Life Insurance Policies (if the aforementioned conditions are met).

As a quick refresher, ULIPs are policies where you pay the premium for a certain number of years(usually around 5), which the insurer invests for you, along with offering a life insurance cover (usually for a sum insured of 10 lakhs). After the premium payment term is over, there is a holding period (eg: 5 more years) and then you receive a maturity benefit. So one example of a ULIP is one where you pay 1 lakh a year for 5 years, and 5 more years later, the insurer returns to you a lump sum of 10 lakhs*. If you pass away in this time frame, your beneficiaries receive an additional death benefit of INR 10 lakhs.

*This sum is just for illustration, ULIPs are linked to equity and debt markets and returns will vary.

Traditionally, ULIP premiums were exempt under section 80C and the maturity benefits were also exempt, as per section 10(10D).

However, for ULIPs a new rule was introduced in 2021, which applies to ULIPs purchased on or after 1st February 2021. The rule is simple:

If the annual premium paid towards the ULIP is greater than INR 2.5 lakhs, then there is no tax exemption on the returns. Any taxable returns are treated as capital gains (not income tax).

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In general, life insurance not only provides a secure source for healthy investment but also provides financial safety in case of death, accident or critical illness. To top that, life insurance also provides tax benefits such as claim over tax deductions and tax-free maturity returns.