It is a good idea to secure the future of your family by buying a life insurance policy. However, it pays to know the tax implications as life insurance is a long-term commitment. After all, you don’t want taxes spoiling your policy return, do you?

This article will share the tax treatment of different types of life insurance policies at different stages. This will help you make an informed decision about the type of policy you wish to buy. Also, it will help you meet your tax compliances adequately. So let’s start…

When you invest in a life insurance policy, you get a deduction under section 80C of the Income Tax Act. This benefit is available for all life insurance policies.

This benefit is available when you buy a policy for yourself or your spouse or child. In case of HUF, this benefit is available when the HUF buys a policy for a member.

Also, this benefit is available for policies purchased from any insurance company registered with the regulatory body IRDAI and not just LIC as some people think.
Few things to note as below:

• If the policy is issued after April 1, 2012: Deduction is available only if the premium amount is less than 10% of the Sum Assured.
• If the policy is issued after April 1, 2013, and covers a person suffering from illness under Section 80DDB or 80U: Deduction is available only if the premium amount is less than 15% of the Sum Assured.

Section 10(10D) of the Income Tax Act clarifies how the insurance policy amount received on maturity will be taxed. The rules are given below:

• Amount received on death is not taxable.
• The amount received from Keyman insurance policy is taxable.
• The amount received on maturity is also exempt as per the following table:

An insurer has to deduct TDS @ 5% if the maturity amount is taxable and the amount payable is INR 1,00,000 or more. This TDS is not on the entire maturity amount and only on the income component of the maturity amount.

TDS deduction does not mean that the amount is not taxable in your hands. This means that you must include the income on your tax return. You can also claim TDS deducted by the insurer.

Keep in mind that this rate is applicable only if you have provided your PAN to your insurer. If not, a higher rate of 20% applies.

Also, in such cases, do not forget to calculate the advance tax liability and pay the advance tax before the end of the year. If you do not do so, you may have to pay additional interest at the time of filing the return.

Let us understand the taxation and TDS effect of maturity with some examples given in the following table:

As you can see, in the first and third case, there will be no TDS implication as there is no tax liability. In the second case, TDS @ 5% will be applicable on the “Income Component” of the maturity amount as the maturity amount exceeds INR 1 Lakh.

No separate taxation provision has been made so far for ULIPs, and it was governed as per the above rules. However, the Finance Act, 2021 has changed the situation.

As per the new changes, the maturity amount from ULIPs will continue to be exempt till the premium amount does not exceed Rs 2.5 lakh. Maturity income will be taxable for ULIPs in excess of this premium amount. The tax calculation is a bit complicated and is based on the holding period and nature of the underlying fund.

The new provisions are unclear on some points and it is expected that the tax position will become clear in the coming days and months.

Keyman insurance policies are policies purchased by employers to cover the death of their key employees. The employer pays the tax for the premium and receives the maturity amount. The amount paid as premium qualifies as a business expense and is allowed as a deduction from income.

On maturity or death of the keyman, section 10(10D) does not exempt payments from these policies in the hands of the employer. So, these policies are taxable and TDS will also be applicable.

The provisions for taxation of single premium policies shall be applicable in the same manner as provided above. There is no separate provision for taxation of single premium policies.