Tax Talk: Know when a life insurance maturity payment is taxable

By Amit Gupta

Premiums paid to insure your life or that of your spouse or children are deductible under Section 80C of the income tax law. This is valid whether your child is dependent or independent, minor or principal, married or not. An individual and a Hindu undivided family (HUF) can claim this deduction under Section 80C.

There are only two requirements for this. First, the insurer must be licensed by the Insurance Regulatory and Development Authority of India (Irdai). And secondly, the premium paid must not exceed 10% of the sum insured, when the policy is issued after April 1, 2012. For policies issued before April 1, 2012, to benefit from this deduction, the insurance premium paid must not exceed 20% of the sum insured. If the life insurance covers the life of a disabled person under Section 80U or a covered illness under Section 80DDB, the premiums paid are eligible for a deduction under Section 80C if they do not not exceed 15% of the sum insured.

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Tax Exemption on Maturity Amount

When the premium does not exceed 10% of the face amount for contracts issued after April 1, 2012 and 20% of the face amount for contracts issued before April 1, 2012, the amount received at maturity of an insurance contract life or premium is fully exempt from income tax under Section 10(10D).

It also includes policies taken out after April 1, 2013 on the life of a person who is disabled or has a disease specified in Sections 80U and 80DDB respectively, where the amount received after maturity is exempt from tax if the premium paid does not exceed 15% of the sum insured under the survivor’s policy.

Tax liability of single premium policies

Let’s take an example to understand taxation. Suresh has a policy with a maturity value of Rs 1,10,000. He paid a premium of Rs 45,000 on September 16, 2013, more than 10% of the sum insured. Thus, maturity insurance income is taxable and cannot benefit from any exemption under Article 10 (10D). On maturity, Suresh cedes it, and since the payment on maturity exceeds Rs 1 lakh, the insurance company is required to deduct tax at 5% from the income on maturity. Here, TDS will be Rs 3,250 (5% of 1.10,000-45,000) and Suresh net income will be Rs 61,750.

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Suresh must now mention this income at maturity under the heading “Income from other sources” when filing his tax return. He can also claim a credit for TDS against his tax payable as defined at the time of filing his tax return.

LIFE AND RESPONSIBILITY

* If the premium does not exceed 10% of the sum insured, the proceeds at maturity are tax exempt and the premiums are eligible for a tax deduction under Section 80C

* For life cover for a person with an illness or disability referred to in Section 80DDB/80U, the premium paid is eligible for deduction if it does not exceed 15% of the sum insured

The author is MD, SAG Infotech