Is the maturity amount of life insurance policies tax-free?

As per Part 10(10D) of the Earnings Tax Act, the sum assured obtained on maturity or give up of a coverage is totally tax-free.

After religiously paying your life insurance coverage premiums, the time could also be nearing on your coverage to mature. Whether or not it’s a money-back or an endowment plan, all conventional life insurance coverage insurance policies have a maturity worth to be obtained by the policyholder on surviving the time period of the coverage.

And, when you had bought the coverage 10-15 or 20 years again, there have been a number of tax-related modifications through the years. So, will you be required to pay tax on the maturity proceeds? Earlier than we see that, let’s see what the maturity proceeds will encompass.

Life Insurance coverage Maturity Quantity

In a typical conventional coverage, the maturity quantity includes two elements – One is the quantity of sum assured and second is the whole of bonuses accrued ( in a with-profit plan) through the years.

Illustratively, when you would have purchased a Rs 3 lakh coverage for 20 years, by paying an annual premium of about Rs 15000, you’ll get the assured quantity of Rs 3 lakh on maturity. Over and above that, based mostly on the bonus declared by the insurer throughout these 20 years, the bonus quantity will get paid on maturity.

Assuming, a bonus of Rs 45 per lakh for annually, yearly bonus quantities to Rs 13500 and whole accrued bonus after 20 years is about 2.7 lakh. So, on maturity, policyholders get Rs 3 lakh ( sum assured) plus Rs 2.7 lakh (bonus) equal to Rs 5.7 lakh.

Life Insurance coverage Tax Guidelines

As per Part 10(10D) of the Earnings Tax Act, the sum assured obtained on maturity or give up of a coverage or upon the policyholder’s dying is totally tax-free. Bonuses obtained with such an quantity are additionally exempt beneath Part 10(10D).


Nevertheless, an necessary situation needs to be met earlier than availing the profit beneath Part 10(10D) – the ratio of premium to sum assured needs to be inside a particular restrict as set by the revenue tax division. This ratio was modified through the years and, subsequently, will depend upon whether or not one has bought coverage earlier than or after 1 April 2012.

Right here is the situation – For insurance policies issued after 1 April 2012, if the premium paid on the coverage doesn’t exceed 10% of the sum assured, any quantity obtained on maturity of a life insurance coverage coverage or quantity obtained as bonus is totally exempt from Earnings Tax beneath Part 10(10D).
For insurance policies issued earlier than 1 April 2012 (after 1.4.2003), it was 20% of sum assured, i.e. the sum assured needs to be a minimum of 20 instances the premium


So, in case you are paying an annual premium (after 1 April 2012) of Rs 1 lakh, the minimal sum assured needs to be saved at Rs 10 lakh. In different phrases, if the sum assured is Rs 10 lakh, it’s essential to pay a minimal premium of Rs 1 lakh to maintain having fun with the tax-free profit on maturity. Within the instance above, one could pay a decrease premium of say Rs 50,000 and but maintain a sum assured of Rs 10 lakh however something above Rs 1 lakh for a sum assured of Rs 10 lakh will make the coverage devoid of tax-free profit.

In nutshell, the annual premium paid ought to be lower than 10 p.c of the sum assured or the sum assured is a minimum of 10 instances the premium for insurance policies issued after 1 April 2012.

Different Tax Advantages

So far as Part 80C is anxious, the identical ratio must be maintained in order that the tax profit could also be loved. Deduction is restricted to twenty% of capital sum assured in respect of insurance policies issued on or earlier than 31-3-2012 and 10% in case insurance policies issued on or after 1-4-2012.

Due to this fact, whereas the maturity proceeds together with bonus and sum assured of conventional insurance policy are tax-free within the palms of the policyholder, topic to fulfilling the above situations, within the case of Ulips, there was a latest tax change. Funds 2021 had launched tax on good points made in Ulips issued on or after February 1, 2021 with an annual premium of Rs 2.5 lakh, the return on maturity shall be handled as Capital Acquire and charged accordingly beneath part 112A.

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