Is Term Insurance Claim Amount Taxable?

What Does Term Insurance Claim Amount Mean?

The term insurance claim is the amount paid by the insurer when a valid claim is made. It’s usually meant to provide financial security to your family in the event of your demise. It can be:

• Death benefit: If the life assured passes away during the policy term, the nominee mentioned in the policy document can claim this amount.
• Maturity benefit (ROP option): In Return of Premium policies, the policyholder can receive the total premium paid at the end of the term if they survive.

It’s important to note that a claim is honored only if it meets the terms and conditions of the policy.

Who can claim?

• The nominee after the insured person’s death.
• The policyholder on maturity, in case of a Return of Premium (ROP) plan.

Many people also wonder whether the term insurance amount is taxable. Death benefits are generally exempt under Section 10(10D) of the Income Tax Act. But maturity benefits or ROP payouts may be taxable if the premium-to-sum-assured limits are breached or if the aggregate annual premium exceeds the threshold for high-value policies.

Tax on Term Insurance Claim Payouts

Before we review whether a term insurance claim amount is taxable, first, it may be helpful to know that term insurance mostly come under the ‘pure protection’ category. This may mean that pure term insurance plans only offer payout in the event of the policyholder’s/life assured’s demise. Most term insurance plans may not have a savings or investment element attached to them.

Some term insurance plans may have a ‘return of premium’ (ROP) feature wherein the policyholder/life assured receives the total of all premiums paid if they survive the policy’s maturity. Aside from the death benefit payout, the maturity benefit amount may also be taken into consideration when looking at the tax on term insurance claim amounts.

The following pointers provide an overview of the taxability of insurance claim amounts received on the death of the policyholder or the policy’s maturity:

The death benefit payout received by the nominee(s)on the life assured’s demise may be exempted from taxation under Section 10 (10D) of the Income Tax Act, 1961 (‘the Act’).

• Section 10 (10D) may also include tax exemption on the maturity proceeds of the plan subject to provisions stated in the act.
• To be eligible for this tax benefit on term insurance claim amounts, the premium of the term insurance plan may not be more than 10% of the death sum assured if the plan was purchased after 1st April 2012.
• If the plan has been purchased before 1st April 2012, then the claim amount may not be more than 20% of the death sum assured to receive this tax exemption.
• One may also pay their premiums on time and ensure to keep the policy active to be eligible for this tax exemption on term insurance claim amounts.
• Apart from the Section 10 (10D) tax exemption, there may be other tax benefits a term insurance policyholder may enjoy.
• With effect from 1 April 2023, if traditional policy/policies including term insurance policies issued with annual aggregate premium more than Rs. 5 lakhs, any income from such policy is taxable. Death benefit from such policy is still tax free in the hands of recipient. In case of ROP option is selected, at the time of maturity gain from such policy will be taxable in the hands of recipient.
   

What Are the other Tax Benefits of a Term Insurance Plan?

Now that it has been explained above whether a term insurance claim amount is taxable or not and under what conditions, let’s also check out the other tax benefits of term insurance.

• Section 80C and Section 80D of the Income Tax Act of 1961 may offer term insurance tax benefits in the form of a deduction from total income to the extent of the term insurance premiums subject to the limits specified in the section under old tax regime.
• Under Section 80C, the premiums of a term plan may be used to claim deductions up to Rs 1.5 lakhs during a financial year.
• Section 80C tax deductions also have the same terms and conditions as the taxability of insurance claim amounts received on death and the policy’s maturity. Thus, the yearly premium of the plan may not be more than 10% of the death sum assured if the plan has been bought after 1st April 2012. And, for policies bought before the given date, the premium may be in the limit of 20% of the death sum assured.
• While Section 10 (10D) considers the taxability of insurance claim amounts received on death and maturity, Section 80D includes tax benefits for health-related insurance covers.
• If you opt a health- related rider such as a critical illness rider along with your base term plan, then you may be able to claim tax deductions under Section 80D up to Rs 25,000 if the person insured under the plan is under 60 years of age. The deduction limit may increase to Rs 50,000 if the person insured is over 60 years of age.

Please note that Section 80C and Section 80D tax benefits are only applicable under the old tax regime.

The following example may help understand the tax on term insurance claim amounts in a better manner:

Avinash bought a term insurance policy with a sum assured of Rs. 75 lakhs in the year 2013. The yearly premium he had to pay was Rs. 25,000. He paid the premiums on time each year and ensured that his family’s future financial security was never in doubt. He also claimed Section 80C deductions when he filed his Income Tax Return every year and reduced his total tax outgo by a considerable margin.

When Avinash passed away unfortunately, his family received the death benefit payout, after the deduction of the standard charges.

His family did not have to pay any tax on the term insurance claim amount, since his yearly premium amount (Rs 25,000) was less than 10% of the sum assured (Rs 75 lakhs).

Thus, a term insurance claim amount is taxable only if the terms and conditions mentioned in the Income Tax Act and as stated by recent amendments are not met.

Under What Conditions Are Term Insurance Claims Tax-Free?

Many people still wonder if the term insurance claim amount is taxable in every situation or if there are any exemptions. Well, the death benefits are generally exempt if you meet the conditions listed below.

• Death Benefit: A death benefit that is paid to the nominee in the event of the life assured's death during the policy term is generally tax-exempt.
• Premium Limited to Sum Assured Ratio: To qualify for full exemption, the policy annual premium cannot be more than 10% of the sum assured (in the case of policies issued after April 1, 2012), if it is term with ROP policy.
• Surrender or bonus values if applicable: Surrender values, and also any bonus attributable to the term insurance, may qualify for tax-exempt treatment under section 10(10D) subject to conditions.
• Return of Premium and other riders: In the case of a return of premium feature or riders (e.g. critical illness, etc), these benefits will also qualify for tax-exempt treatment under 10(10D) subject to conditions.

What Documents are Required for Tax-Free Claims?

When the life assured passes away, the first step is to notify the insurance company as soon as possible. This notification, called a claim intimation, can be made by the nominee, assignee, a close family member, or even the agent managing the policy.

Once the claim is reported, the insurance company will request specific documents to process the claim, including:

1. Duly filled claim form (provided by the insurer)
2. Death certificate issued by the competent authority
3. Original policy document
4. Assignment or re-assignment deeds, if applicable
5. Legal proof of title (if there is no nomination or assignment)
6. Discharge form, duly signed and witnessed

Providing accurate details and complete documentation ensures a smoother claim settlement process.

Conclusion

Term insurance may help you provide a better financial future for your family in the case of an untimely event. Alongside, you may also receive some considerable tax benefits, including tax exemption on the term insurance claim amount under Section 10 (10D) of the Income Tax Act of 1961 if conditions under section 10(10D) are fulfilled. Section 80C and Section 80D may also provide tax deductions up to Rs 1.5 lakhs and Rs 50,000 respectively, subject to provisions stated therein.

Key Takeaways

• Term insurance claim amounts paid to the nominee are usually tax-free if conditions under the Income Tax Act, 1961 are met. The applicable section is Section 10(10D).
• If your plan has a Return of Premium (ROP) option, the payout is also exempt, subject to limits on premium.
• Policies with total annual premiums over ₹5 lakh which are issued after 1 April 2023, may have taxable maturity amounts. However, the death benefits remain tax-free.
• Always pay premiums on time to keep your policy active and retain tax benefits.
   

FAQs

1. Who is eligible to claim tax benefits on a term insurance premium?

   The person who pays the premium, i.e., the policyholder is eligible to claim tax benefits on the term insurance premium. Apart from that premium paid on behalf of Spouse and dependent children are also eligible for Tax benefits under section 80C subject to fulfilment of conditions specified thereunder.

   
   

2. Should you buy a term plan considering the tax benefits only?

   A term insurance plan is much more than the tax benefits that it offers. It allows financial security in the event of the premature demise of the breadwinner. The term plan is meant for creating a provision against the uncertainties of life. It is better to buy a term insurance policy for the coverage and financial security that it provides. The tax benefit can be an added advantage.

   
   

3. What are the Term insurance tax benefits under section 80C?

   Section 80C of the Income Tax Act, 1961 allows the premium as a tax-deductible option. You can deduct the premium paid for the policy from your taxable income and reduce your tax liability. The deduction limit is Rs.1.5 lakhs3. However, the following aspects of the 80C deduction should be kept in mind¹ –

   • The deduction is available only under the old tax regime.
   • If you buy the policy on or after 1st April 2012, premiums up to 10% of the sum assured would be allowed as a deduction.
   • If you buy the policy on or after 1st April 2013 and you suffer from a disability or a disease as specified under Sections 80DDB or 80U, premiums up to 15% of the sum assured would be allowed as a deduction.
   • If you buy the policy on or before 31st March 2012, premiums up to 20% of the sum assured would be allowed as a deduction.
   • If you surrender the policy within the first two years, the 80C benefit allowed would be reversed and will be considered as taxable income.
      

4. Which health-related add-ons in term insurance qualify for tax benefits under Section 80D?

   Riders such as critical illness rider, hospitalisation, or surgical care added to a term insurance plan qualify for deductions under Section 80D of the old tax regime.

   
   

5. If I opt for death benefit in instalments, will it be subject to tax?

   The mode of payment (lump sum or instalments) does not impact tax exemption. As long as the death benefit meets Section 10(10D) conditions, installments will also be tax-free for the nominee.

   
   

6. Are there any scenarios where the beneficiary might still have to pay tax on the claim amount?

   Yes, if the premiums exceeded the prescribed limits under Section 10(10D), the excess portion of the death benefit could be taxable.