Income tax calculator: How your life insurance policies are taxed — explained

May 14, 2022

CA Chandan Agarwal's Office

Income tax calculator: As per section 10(10D) of income tax act, maturity proceeds including bonuses received from regular life insurance policy are fully exempt from taxations

Income tax calculator: Buying a life insurance policy is must to ensure a financially secured life of your family. Though, life insurance policies helps you claim income tax exemption under section 80C on the premium paid for life cover, there are certain tax implications that an insured must look at while buying a life insurance plan.

Deduction under section 80C

Speaking on section 80C of the income tax act applies on life insurance, SEBI registered tax and investment expert Jitendra Solanki said, “To claim income tax department allows deduction under section 80C of the income tax act, premium paid for a life insurance plan should not exceed 10 per cent of the sum assured for a life insurance policy issued on or after 1st April 2012. For life insurance policies issued prior to 1st April 2012, this premium limit is 20 per cent of the sum assured.”

Income tax rule on maturity proceeds, bonus

“As per section 10(10D) of income tax act, maturity proceeds including bonuses received from regular life insurance policy are fully exempt from taxations. There is only one catch to avail this exemption. This is ratio of premium paid to sum assured,” said Sujit Bangar, Founder at Taxbuddy.com. Sujit Bangar said that in case of premium amount exceeding the 10 per cent or 20 per cent sum assured limit, any money received from the insurer will be fully taxable.

Income tax rule on ULIPS

“In case of ULIPS, as pronounced in Budget 2021, maturity proceeds would be taxable as capital gain if annual premium is more than ₹2.5 Lakh,” said Sujit Bangar of Taxbuddy.com.

When you surrender your life insurance

On income tax rules when you opt to surrender your life insurance policy, Shruti Khandare, CMO at MyFundBazaar India said, “On hindsight, if you choose to surrender your life insurance, the insurer will give you your cash value minus any surrender charge for which you won’t be taxed. However, you will be taxed on the amount you’ve received minus the policy basis. This taxable amount reflects the investment gains that you took out.”

Taxability on loan against insurance

Shruti Khandare of MyFundBazaar India went on to add that if you have a policy with cash value & have taken out a loan against it, the loan isn’t taxable as long as the policy is in-force. In case the policy terminates before you’ve paid the loan back, you most certainly will get a tax bill.

Tax rule on delayed insurance payouts

“Insurance payouts that are delayed or paid in instalments over time by the beneficiaries can be taxable especially when these delayed payouts include interest from the life insurer,” said Shruti Khandare of MyFundBazaar India.

Unhappy scenario in insurance payout

“Another possible unhappy scenario is when life insurance payouts are made tax-free but the beneficiary was not named or is already deceased, in which case it goes into the estate of the insured person and can be taxable along with the rest of the estate,” Shruti Khandare said.

Source: https://www.livemint.com/money/personal-finance/income-tax-calculator-how-your-life-insurance-policies-are-taxed-explained-11652492314676.html

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Income tax calculator: How your life insurance policies are taxed — explained

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