In today’s uncertain world, every individual takes insurance policy in some form or the other. But, many of them are not aware of the taxation of the proceeds of insurance policies. The general notion among people is that the proceeds of insurance policies are totally tax-free. But, they are subject to certain conditions along with some exceptions. In this article, I would detail about various insurance policies and the taxation of such insurance plans. Should you pay income tax on life insurance payouts?
What are different types of insurance plans in India?
It is very important from the taxation point of view that the individuals are acquainted to all such circumstances. However, let’s have a look at various types of insurance policies prevalent in India.
It is the most basic form of life insurance. It provides life cover with no profit or no maturity amount. The premiums are quite cheaper as there is no pay out if the insured survives the policy period. In simple terms, if insured dies, his family / nominee gets sum assured, otherwise, it ceases once the insurance term is over.
It is different from term plan in one way i.e. maturity benefits. These plans pay out the sum assured in both cases, death and maturity. Endowment plans charge higher fees for paying out sum assured along with profits. The profits are the result of premiums being invested in equity or debt market.
Unit Linked Insurance Plans (ULIP)
ULIPs are a variant of traditional endowment plans. These plans are a combination of investment and insurance. The insured choose the allocation of funds in stock or debt market. The policy is valued in terms of net asset value (NAV). The payout is given in both these cases, death and maturity.
Whole Life Policy
The tenure of this policy is not defined. The policy insures the policyholder over his life. The policyholder pays regular premium throughout his life and the corpus is paid to his family after his death.
Money backs policy
It is another variant of endowment plan. It gives periodic payments over the policy term. If the policyholder survives, the balance amount is paid out and if he dies, the whole of the sum assured is given to his nominee.
Should you pay Income Tax on Life Insurance Payouts?
Section 10(10) of the Income Tax Act 1961 exempts the sum that is received under insurance policy paid from April 1, 2012 but the premium for any of the years during the tenure of the policy should be within the 10% of the actual sum assured.
For the policies that are issued after April 1, 2003 but on or before March 31, 2012, if the premium payable in any year during the tenure of the policy does not exceed 20% of the total sum assured, then the policy proceeds would be free in the hands of the insured.
In case, the premium payable exceeds the prescribed percentage as described above, then the whole proceeds of the policy would get taxed in the hands of the receiver in the year of receipt. However, in case the insurer dies and his nominee receive the policy amount, then the same will be tax free in the hands of nominee, even if premium crosses the prescribed limit.
At times, the insured directs the insurance company to pay the amount of his policy to the nominee in part payment or to pay after holding it for some time. In such a case, the insurance company becomes liable to pay interest for holding the balance of the death benefit payout. Interest income is always taxable. So the amount of policy payout is tax-free but the interest amount is subject to taxation as per the normal rules of income through interest.
Should you pay income tax on Keyman Insurance policy / Proceeds of Employer provided insurance plan?
Keyman Insurance policy is nothing but the proposer and premium payer is employer, however the life insured is employee. Under keyman Insurance policy, the proceeds are not tax-free as per Sec 10(10D) of the Income Tax Act.
Also Read: Max Life Online Term Plan – Should you opt?
How much TDS deducted from insurance payouts?
The policy proceeds that are exempted under Sec. 10(10D) will be given to the insured without deducting any TDS. If the insurance proceeds are not exempted under sec. 10(10D) shall be subject to the deduction of TDS @ 2%. To add more, if the sum is taxable under Sec. 10(10D) but do not exceed Rs. 1,00,000, then also no TDS is deductible.
Another important point to be noted is that if the insured has not submitted his Pan card to the insured, the rate of applicable TDS would be 20% instead of 2%.
To extend, if the policy is taken from any foreign insurer (i.e. not registered in India), it may involve some extra conditions that may vary from case to case.
Conclusion: Almost all the people take life insurance policies to safeguard the future of their families, but very few people are aware of its tax implications. Most of them are under the misconception that it is totally tax-free. But, it is not the case. Hope, this article makes a clear understanding on the various prospects of tax and TDS on life insurance policies.
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Should you pay Income Tax on Life Insurance Payouts