Tax implications of Life Insurance policies
Many people have an idea that benefits received from the maturity of life insurance policies are tax-free. But it is not always true as all life insurance policies do not give tax exemption on the maturity amount. Many such policies provide tax benefits on the maturity amount but all of them are not fully tax-free.
There are some essentials which are to be fulfilled by a policyholder to be eligible for tax benefits. The benefits received on maturity of the policies are exempted from tax if the following conditions are fulfilled as per Section 10(10) D of Income tax Act:
- The amount was invested for at least 5 years and it was not withdrawn before that.
- The ratio between Premium and Sum Assured has to be minimum 1:5 in all the years and should never be violated.
Tax benefits under Section 10(10D):
As per provisions of section 10(10D) of the Income Tax Act, the maturity benefits of life insurance policies are tax-free if the premium is less than 20% of the sum assured or the sum assured is minimum five times of the premium paid. From the current year, the sum assured is required to be at least 10 times of the premiums paid.
Tax benefits under section 80C:
As per provisions of section 80C of the Income Tax Act, premiums paid for life insurance policies provide a tax deduction up to Rs1,00,000/- Till last year, if the premium paid was more than 20% of the sum assured, then tax deduction was available for them. But from this year the premium is required to be less than 10%.
At the time of death of the insurer, benefits received from a life insurance policy do not belong to the category of taxable income, unless the policy has been transferred to the taxpayer for an amount. In such cases, few issues may turn up. One should ask a tax professional to handle the issues properly for tax purposes; otherwise, the proceeds become taxable income.
Often the benefits from the insurance policy accumulate interest between the date of death and the date of release which becomes taxable income. One should always include this amount in his income tax return. The benefit may also be included in a return, but this is generally not taxable income.
If someone has a cash value life insurance policy which earns dividends, he may be liable to pay taxes on the dividends which are more than the amount of the premiums paid by him. But policy dividends are not always taxable. But the dividends received must be included in tax return.
Life Insurance is an important part of a person’s personal life. The proper guidance to life insurance is a vital matter. One should always know its tax implications before entering into one.