There is a general belief that the benefits received from life insurance policies are tax-free. However, this perception is not completely true. The tax benefits and exemptions come with different conditions. If you are a life insurance policyholder, you must know when you can claim a tax exemption and when it is not allowed.
For this purpose, let us carefully look into Section 10 (10D) of the Income Tax Act, 1961.
About Section 10 (10D) of the Income Tax Act
Section 10 (10D) of the Income Tax Act states that the benefits and bonuses received from your life insurance policy are completely tax-free. The benefits include death, maturity, and surrender. However, in certain situations, the profits are taxable for the policyholder.
Here are the scenarios when it will be taxable:
- Under Section 10 (10D), if your insurance policy was issued in between April 1, 2003, to March 31, 2012, the total premium paid towards the policy cannot be more than 20% of the actual sum assured. If it is more than 20%, you will have to pay taxes on the profits. As explained in Section 80C (3A), the actual sum assured is the minimum amount of money guaranteed by the insurer, excluding any benefits. Remember that the actual sum assured does not include any premium that the insurer returns to you.
- Since April 1, 2012, the limit of 20% has been lowered to 10%. However, Section 10 (10D) of the Income Tax Act has made some modifications for policies issued since April 1, 2013. For any policyholder with severe disease or disability, the limit has been raised to 15%. However, in case of disability, it has to be specified under Section 80U, and for disease, it has to be mentioned under Section 80DDB.
- If the premium paid towards your policy exceeds beyond the limits specified by the Income Tax Act, you will have to pay tax on the actual sum assured on the year you receive it. One important thing that you must remember here is that the taxation does not apply to death benefits. The sum assured received by the nominees in case of the policyholder’s untimely passing is tax-free even when the premium paid is over the limit.
- Under Section 10 (10D) of the Income Tax Act, any earnings received from Keyman insurance policy do not come with tax benefits and are completely taxable.
Understanding and remembering Section 10 (10D) mandates are important for any life insurance term plan policyholder. This will help you get the best out of the tax exemption rules and save on taxation.