Financial protection is vital during these uncertain times. By availing of term insurance, individuals provide themselves and their families with a layer of financial security which can go a long way in serving and safeguarding them. Operating as a form of life insurance, there are a lot of misconceptions pertaining to tax policies that surround term insurance. Making oneself aware of all that term insurance and associated tax policies entail is prudent. This ensures no confusion in the future and term insurance tax benefits can then be taken advantage of in an appropriate fashion.
How does term insurance work?
Term insurance serves as one of the most affordable forms of life insurance policies available in the market today. When availing of term insurance, individuals select the desired plan keeping in mind the sum assured they would like to avail of ultimately and pay a premium based on this. This term insurance is bought for a specific time frame and in the event that the insured individual dies during this time, their nominees/ beneficiaries are entitled to a death benefit which is paid by the term insurance company. As it is presently available online, term insurance is a relatively easy purchase to make.
Is a term insurance payout taxable?
Owing to the fact that term insurance is a form of life insurance, it is subject to the same taxation policies that surround all life insurance policies issued in India. The next section highlights the same.
Section 10(10)D of the Income Tax Act, 1961
Section 10(10)D of the Income Tax Act, 1961 stipulates that the sum assured in addition to any bonus (which is ordinarily the policy proceeds) paid on maturity, surrender of the policy, or in the event of the death of the insured individual is exempt from all taxes for the beneficiary but are subject to certain conditions.
The aforementioned policy proceeds are taxable for the insured individual in the following circumstances –
- If the policy was issued after April 1, 2003, but on or prior to March 31, 2012, and the premium payable in any year surpasses 20% of the capital sum assured (i.e. death sum assured), then said policy proceeds are taxable in the hands of recipient. The capital sum assured here refers to the least amount of sum assured mentioned in each policy year and which doesn’t include a bonus amount that would be receivable in addition to the assured amount. For policies issued on or after April 1, 2012, the aforementioned limit of 20% has been altered to 10%.
- In the event that the policy was issued on or after April 1, 2013 and the insured individual suffers from an extreme disability (specified under section 80U) or disease (specified under section 80DDB) which is specified by the Income Tax Act 1961, the limit of 10% is increased to 15%. If for instance, the premium payable in any of the years falling under the term specified to have a prescribed percentage that exceeds 10%, 15%, or 20% of the capital sum assured, then the proceeds of the entire policy would be taxable in their entirety. This taxation would be applicable in the year the beneficiary availed of these funds. However, this doesn’t hold true if the proceeds are received in the form of a death benefit owing to the death of the insured individual. In this case, the proceeds are entirely tax-free regardless of whether the premium paid in any of the years prescribed surpassed the percentage sum assured.
Is TDS applicable to the payment of term insurance policy proceeds?
Section 194DA of the Income Tax Act, 1961 stipulates that Indian residents insured under a life insurance policy are required to deduct TDS at 5% on income from policy if the sum insured is not exempt under section 10 (10D). If the payout under policy which is not satisfying Section 10(10D) criteria is less than Rs. 1 lakh, then TDS can’t be deducted by the insurance company responsible for paying the insured. Policy holder must submit their PAN to their insurance company such that the TDS applicable remains 5% as opposed to 20%.
Individuals seeking to avail term insurance must do due diligence prior to availing the policy of their choice and should submit appropriate documents to the insurance company at the time of application including PAN. Term insurance tax benefits are easy to get caught up in, it is important to make oneself well versed with tax policies surrounding the same such that there is no confusion for the insured or their beneficiaries in the future.
W.e.f. 1 July 2021, it is proposed that in the absence of PAN-Aadhar linking, PAN will be treated as inoperative and if policy proceeds are not satisfying Section 10(10D) of Income Act, 1961, will attract 20% TDS on income from policy.
Tax laws are subject to amendments from time to time. Please check with your tax consultant for eligibility. Please note that the above tax write-up is for general understanding and reference purpose only. The reader will have to assess the validity and accuracy of the facts, law and content with the prevailing tax statutes and seek appropriate advice from tax professionals before taking any action on the basis of the above information.