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Does the nominee of Life Insurance Pay Taxes?


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June 27, 2022

By : Bajaj Allianz Life

A life insurance plan is one of the easiest ways to ensure that your family remains financially stable and independent even when you’re no longer there to take care of them. When the policyholder faces an untimely demise during the tenure of the life insurance plan, the insurance company pays out a predetermined sum of money, known as the death benefit to the nominees. This payout can then be used by the nominees as they see fit.

However, since the payout as received by the beneficiary tends to be a lump sum amount, would life insurance proceeds be taxable in the hands of the recipient? If this is a question that’s been on your mind for quite some time, then this article can provide you with an answer.

 

Is life insurance premium tax deductible?

 

Firstly, life insurance offers multiple tax benefits, one of them being the ability to deduct the life insurance premiums that you pay from your total income.

According to section 80C of the Income Tax Act, 1961 (‘the Act’), a policyholder can claim the premium paid towards a life insurance policy as deduction from the total income to the tune of Rs. 1.5 lakhs in a year subject to provisions stated therein. This allows the policyholder to reduce his/her income tax liability by a significant amount each year.

That’s not all. Policyholders can also avail another deduction under section 80D of the Act as well. For instance, if a life insurance policyholder has also opted for critical illness rider, he would be eligible to claim rider premium of up to Rs. 25,000 each year as deduction from the total income as per the provisions stated in the Act.

So, to sum it up, as far as life insurance premiums are concerned, they are tax deductible.

 

Does the nominee of life insurance Policyholder have to pay tax?

 

Now that we’ve seen that the life insurance premiums are eligible for tax deductions, let’s take a look at the taxability in the hands of the nominees.

Now, many life insurance plans come with maturity benefits that are paid out to the policyholder themselves if they survive till the end of the policy term. So, will the policyholder have to pay tax on the maturity proceeds?

Section 10(10D) of the Act, provides exemption from tax on the proceeds of a life insurance policy in the hands of the recipient subject to the following:

  • If the life insurance plan was issued on or after 01.04.2003 but on or before 31.03.2012 and the yearly premium that the policyholder is required to pay is less than 20% of the sum assured.
  • If the life insurance plan was issued on or after 01.04.2012 and the yearly premium that the policyholder is required to pay is less than 10% of the sum assured.

On the other hand, if the yearly premium in both the above cases exceeds 20% and 10% respectively, the life insurance proceeds are taxable in the hands of the recipient.

Okay then, what about death benefits? Are they also taxable in the hands of the nominee of life insurance?

Now, when the policyholder dies during the policy term, the sum assured under the policy is paid out to the nominee listed under the plan as a death benefit. Here, the insurance beneficiary is the nominee, considering the fact that the policyholder is no longer alive.

In this case, however, section 10(10D) of the Act, explicitly states that all death benefits receivable under a life insurance policy would not be taxable at all except for keyman policy. That said, the nominee receiving the said benefit will still have to disclose the aforesaid receipt in his Income tax return (ITR).

 

Added advantage offered by term insurance policies

 

Term insurance is one of the many types of life insurance plans that you can purchase. It is considered to be a pure insurance plan and differs slightly from the others in terms of its features.

A term insurance, unlike other life insurance policies, does not offer any maturity benefits whatsoever. Instead, it only comes with death benefits. So, if a term insurance policyholder survives till the end of the tenure, he/she would not be eligible to receive any payout except when a policyholder is opting for a term insurance with Return of Premium option.

However, since such plans do not provide any maturity benefits, term insurance products tend to charge a very nominal premium. In fact, term insurance premiums are the the most affordable out of all life insurance products.

That’s not all. Term insurance policies also enjoy the same tax benefits as a typical life insurance plan.

 

Conclusion

 

As you can see, life insurance isn’t taxable except in cases where the yearly premiums exceed the given thresholds. That said, don’t let tax benefits be the only reason for investing in a life insurance plan. It also comes with other benefits like helping you secure the financial future of your family in the event of any untoward incidents. So, what’re you waiting for? Consider getting yourself insured right now. You can even buy life insurance online within just a few minutes.

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2Above illustration is considering Male aged 25 years | Non-Smoker | Life Cover Variant | Policy term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | medical rates | Annual Premium Payment Mode | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only.

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The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information. 

The views stated in this article is not to be construed as investment advice and readers are suggested to seek independent financial advice before making any investment decisions. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com) carefully before concluding a sale.