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Are Life Insurance Claims Taxable?

Author: Team Finpage
Taxes on Life Insurance Claims
Monday, April 22, 2024

Life insurance offers financial security to your loved ones in the form of death benefits to the nominee(s) in the event of the policyholder’s demise. Previously, policyholders could also enjoy tax benefits on the premiums they paid towards a life insurance policy, which added to the savings they accrued. Until March 2023, traditional life insurance policies, except ULIPs, had an EEE rating, which stands Exempt-Exempt-Exempt. This means the investment, earnings, and maturity of the insurance are not taxed. However, the Central Board of Direct Taxes issued fresh guidelines that came into effect after the release of the Union Budget 2023. Read on to find out the new tax liabilities on life insurance claims.

Taxation Rules for Life Insurance Claims 

No tax rebate is available on maturity proceeds of life insurance policies, except for ULIPs, with a premium of more than ₹5 lakhs in a financial year. This applies to all policies issued on or after April 1, 2023. In case of more than one insurance policy, the same rule will apply if the cumulative premium exceeds ₹5 lakhs.

A single-premium insurance will now be taxable if the premium paid exceeds 10% of the sum assured in a financial year. The difference between the maturity value and the premium paid will be taxable, instead of the entire maturity proceeds. No taxes on maturity are levied if the premium is less than 10% in a financial year. 

However, this proposal does not impact the tax exemption provided on the death benefit, including the bonus, under Section 10(10D) of the Income Tax Act, 1961. This means the entire amount that the beneficiaries receive will be tax-free. The new tax guidelines also do not affect policies issued before March 2023.

Life insurance claims with premiums of more than ₹5,00,000 are now taxed to avoid misuse by the more affluent sections of the Indian population. High-net-worth individuals were likely to invest in policies with high premiums and claim exemptions on the sum assured.

How to Save Taxes if your Aggregate Premium is ₹5 Lakhs

Tax saving is a great way to add to your financial stability. You can maximise your savings and achieve your life goals. Here’s a look at how you can save on taxes if your aggregate premium exceeds ₹5,00,000 in a single financial year.

If your income is up to ₹7 lakhs per annum, consider switching to the new tax regime. This allows reduced tax rates and simpler tax filing. You can enjoy a full rebate on your annual income. You do not have to invest in tax-saving instruments like life insurance to save taxes.

If you wish to avoid getting a single high-premium policy, opt for two or more policies with lower premiums until you reach the ₹5 lakh limit. For instance, you could choose two life insurance policies, each with a premium of ₹2,50,000. The benefit here is that you can cancel out one of the policies during a financial crisis and still be covered by life insurance. You may also take out smaller insurance for your children or spouse. This is helpful since the ₹5 lakh limit applies to each policyholder individually. So, they do not have to pay taxes on maturity.

Insurance is more of a risk-mitigating tool rather than helping us to save taxes. However proper tax planning can help you enjoy the insurance benefits along with saving taxes. Make sure to read the terms and conditions of the policy thoroughly before buying a policy. 

Team Finpage

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