Are The Proceeds From Your Insurance Policy Tax Free?

Insurance policies have often been touted as tax-efficient because their proceeds are generally tax-free.

But, in recent times, as a result of changes in the income tax laws, there are some exceptions to the rule that make the amount received on maturity taxable.

Here are some of the major instances that insurance buyers should be aware of:

It must be noted that any amount received from an insurance policy following the death of the policy holder is tax-free in the hands of the receiver under Section 10 (10D).

On the other hand, any amount received as per the terms and conditions after the policy period is complete is taxable.

So, the exceptions under which the receipts become taxable cover situations other than death.

There are rules that govern the amount of premium paid as a percentage of the sum assured.

If the premium paid on a policy in a year is more than 10% of the sum assured (or 20% for policies started before April 1, 2012) of the policy, then the amount paid out at the time of maturity will be taxable in the hands of the receiver.

This figure is often violated in case of single premium policies and should be considered carefully.

For example, if the individual is buying a policy with a sum assured of Rs 3 lakh, where the premium is Rs 45,000, the condition is violated and the sum assured will be taxable at maturity.

There is a new condition that is in force for unit-linked policies bought after Feb. 1, 2021.

The condition states that if the premium paid on a unit-linked policy exceeds Rs 2.5 lakh in a year, then the amount that is received at the time of maturity will be taxable in the hands of the receiver.

This effectively means that high premium paying unit-linked policies no longer have the benefit of the tax-free status.

The rule also applies on the premium paid on multiple policies. In some scenarios, individuals buy multiple unit-linked policies. Here, if the sum of the premium exceeds Rs 2.5 lakh, the amount received from the policies becomes taxable.

(Arnav Pandya is the founder, Moneyeduschool.)