Term insurance plans in India are one of the preferred options for individuals looking to financially safeguard their family. Not only do they financially compensate your beneficiaries upon your untimely demise by way of a death benefit, but they are also very cost-effective as compared to other life insurance plans. You can avail a sizable amount of sum assured by paying just a fraction of it as premiums.
If you’re still not convinced, you can make use of a term insurance calculator and see for yourself. That aside, the most popular question that many individuals seem to have is ‘is term insurance payout taxable?’ The answer to this question is quite simple too.
If you are also wondering about this, keep reading to find out -
Receipts of term insurance claim from insurance company
Now, you might be aware of the various tax deductions that term insurance policies offer. However, what you may not know is that the Income Tax Act, 1961 also provides tax exemptions to a term plan.
According to section 10(10D) of the Income Tax Act (“the Act”), the death benefit that your nominees/beneficiaries receive upon your demise is completely free from tax. This effectively means that your nominees/beneficiaries are not required to pay any tax on the amount that they receive, which allows them to utilize the death benefit to the fullest extent. That said, there is a certain condition that has to be satisfied.
In order for the death benefit to be exempt from taxation under section 10(10D) of the Act, the total sum assured should be at least ten times that of the annual premium that you pay towards the term plan.
For instance, if you pay an annual premium of Rs. 10,000, the sum assured should be at least Rs. 1,00,000 (Rs. 10,000 x 10) for the death benefit to be exempt from tax in the hands of your beneficiaries.
Gratuitous payments received from employer 1
In some cases, in the event of the untimely death of an employee, their employers might make lump sum payments to the family of the deceased employee. These payments are entirely gratuitous and are done to provide financial support to the family of the deceased employee to help them realize their life goals.
Such lump sum gratuitous payments made by the employer would not come under the purview of income, and therefore would be exempt from taxation in the hands of the recipient family. The Central Board of Direct Taxes (CBDT), the statutory authority for direct tax matters in India, has even issued a circular in this regard.
Here is an example. Assume that you are an employee of a company who faces an untimely death. Your employer, on compassionate grounds, disburses a payment of Rs. 3 lakh as financial compensation to your family. The sum of Rs. 3 lakh that your family receives would not be subject to taxation in their hands, allowing them to fully utilize the same without any tax burden.
Payments received under a will or by a way of inheritance2
According to the provisions of the Income Tax Act, 1961, any amount that an individual receives as a gift, in excess of Rs. 50,000, are considered as income and are taxed in their hands accordingly. However, there is an exception to this rule.
If an individual under a will or through an inheritance receives the payments, such payments, although exceeding Rs. 50,000, are not taxable in the hands of the said individual. Here is an example to help clear things out.
Assume that your parents meet with an untimely demise, leaving behind a will in your favor. Any and all payments that you receive by way of an execution of the will are not considered to be income and so are not taxable in your hands, even if the payments exceed Rs. 50,000.
Now that you know about term plans, make sure you opt for a term insurance plan today and secure your loved ones. Before you go ahead with the purchase of a term plan, you could always use a term insurance calculator to determine the amount of cover that you would need to secure your family’s financial future and the amount of premium you would have to pay for it.