A life insurance plan offers security to a family after the policyholder’s demise. It provides financial assistance to a family during an emergency. However, money received in the form of insurance benefits is a part of your income and comes under the purview of income tax.
To reduce the tax burden of Indian citizens, the government has introduced Section 10(10D) of the Income Tax Act which offers tax exemptions on any amount paid out under a life insurance policy. Keep reading to get the details!
As per Section 10(10D), there will be no tax implications for claims originating from life insurance policies. Such claims can include death benefits and accrued bonuses.
For example, let’s say Mr. Agarwal bought a term insurance plan and nominated his son as a beneficiary. Unfortunately, Mr. Agarwal died in a road accident, and his insurer disbursed the death benefit to his son (nominee). Such a payout may seem like an income. However, Section 10(10D) ensures that this amount is not taxed.
Here are the primary provisions under Section 10(10D) of the Income Tax Act, 1961:
Certain exceptions to this Section are as follows:
In case payment from a life insurance plan is more than Rs. 1 lakh and the insurance policy is not applicable under this Section, then your insurance company will deduct 1% TDS prior to making the payment. This is in force from October 2014.
Furthermore, your insurer will deduct TDS on bonus payments. If your payment is below Rs. 1 lakh, then there’ll be no TDS exemption. While this payment will be completely taxable, a person may claim credit for tax deducted at source at the time of ITR filing.
The maturity amount from a single premium insurance policy is not eligible for Section for exemption under Section 10(10D). However, maturity benefit amounts are not taxable in case the sum assured is 10 times the amount of premium payable for the policy period.
Maturity payouts must satisfy the following conditions for individuals to avail tax benefits under this Section:
Here are the terms and conditions to tax benefit under Section 10(10D):
Also Read: Section 115 BA Of The Income Tax Act
Needless to say, many people have used insurance policies as tax-saving tools over the years. The primary aim of Section 10(10D) of the Income Tax Act is to encourage people to purchase life insurance policies for protecting their loved ones. However, you must understand the policy terms and exceptions before taking the plunge.
1. What is the maximum exemption available under Section 10(10D)?
The total payment under a life insurance policy is eligible for tax exemption under Section 10(10D) of the Income Tax Act. This means that the Income Tax Department has not set an upper limit for this tax benefit.
2. Are there any other tax benefits available for life insurance plans?
Yes, as per Section 80C of the Income Tax Act, 1961, the premium payables for a life insurance plan are eligible for a tax deduction. You can opt for a deduction of up to Rs. 1,50,000 under this section.
3. Do we need to pay taxes on the life insurance maturity amount?
As per Section 10(10D), the payment made on surrender or maturity of an insurance policy or at the time of a policyholder’s demise will be tax-fee. However, you need to satisfy the following conditions:
4. How are life insurance policies beneficial?
Life insurance policies can be helpful to you in the following ways:
5. Is ULIP a type of life insurance policy?
ULIPs (Unit Linked Insurance Plans) merge financial investment with life insurance. These policies offer multiple portfolio strategies and fund options. They have a lock-in period of 5 years. After this period is over, you can withdraw money from this plan regularly.
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