Many people think that the benefit amount they receive on the maturity of all life insurance policies is exempt from income tax. However that is not always so as all life insurance policies do not provide a tax exemption on the proceeds on maturity.
Most of the life insurance policies provide tax benefits on the maturity amount but all of them are not tax-free.
Conditions to be fulfilled to get tax exemption:
There are certain conditions which a life insurance policy should meet after for availing the tax benefits. The proceeds received on maturity of the life insurance policy are exempted from income tax only if the following conditions are fulfilled as per section 10(10)D of the Act:
1. The amount has been invested for at least 5 years and the same has not been withdrawn before that period;
2. The ratio between premium and sum assured should be minimum 1:5 in every year and should not be violated.
If the above conditions are fulfilled, then only the maturity proceeds from the insurance policies will be tax free under section 10(10) D of the Act. If any one of the conditions is violated, the maturity proceeds would not be tax free.
Most of the our traditional plans like endowment plan, money back plan, etc. are framed by maintaining the sum assured more than 5 times of the premium that makes the maturity proceeds tax-free. However one should always check the details of his policy before getting insured.
It has been recently held by the ITAT Delhi in the case of DCIT, Circle 37(1), New Delhi vs. Naresh Kumar Trehan, 2015 (2) TMI 627, that the amount received from life insurance on maturity of key man insurance policies is taxable in the hands of assessee. The Insurance Company has clarified that upon assignment of the policy it does not continue to be a key man policy but gets converted into an ordinary one. For the said reason the benefits drawn there from is taxable in the hands of the concerned assessee.
The ITAT, Delhi has held that the surrender value is taxable in the hands of the key man but the assessee paid the surrender value to the company which took out the said policies, and the said amount was already taxed in the hands of the company. Both the parties to the case agreed that the issue was covered by the judgment of the Hon’ble Delhi High Court in the case reported in 2011 (12) TMI 392.
General rules governing amount received from Life insurance proceeds:
Life insurance proceeds received on maturity are exempt from tax no matter who paid the premiums of the said policies.
The maturity proceeds received are exempt under Section 10(10D) of the Act and should be declared under exempt income in the income tax return.