Life Insurance Claim: The life insurance claim received by the nominee after the death of the policyholder is usually tax free, but in certain situations it may be taxed. Rule Section 1
Life Insurance Claim: The life insurance claim received after the death of a loved one is very important from both emotional and financial perspective. But, one question confuses many people, is this amount completely
tax free or do we have to pay tax on it?
Let us understand in detail what the tax rules say on life insurance claim received after death, in which cases exemption is given, and in which cases tax may have to be paid.
Rules regarding tax on insurance claim?
Under Section 10(10D) of the Income Tax Act, if the amount received by the nominee after the death of an policyholder is completely tax free.
This means that if you get Rs 25 lakh, Rs 50 lakh or even Rs 1 crore as a nominee, the Income Tax Department does not levy any tax on it.
When will an insurance claim not be tax free?
Normally, income tax is not levied on the money received from life insurance if the payment falls under Section 10(10D) of the Income Tax Act. But there are certain situations in which this exemption is not available. Let us understand when an insurance claim is not tax free.
1. Payout of Keyman Insurance Policy
If a company buys a Keyman Insurance Policy in the name of an important employee and later the amount received from it is received by the company, then it is not tax free. Because in this the benefit goes to the company and not to the family of the deceased. Therefore, it is not covered under Section 10(10D).
2. Payments under Section 80DD(3) or 80DDA(3)
If the payment under a policy is received on the death of a disabled person, and it comes under Section 80DD(3) or 80DDA(3), then it is also outside the tax exemption of 10(10D). This payment is not considered as death benefit, but a type of fixed investment (deposit with condition).
3. Policies between 2003 to 2012
If you bought a policy between 1 April 2003 to 31 March 2012 and the annual premium in it is more than 20% of the sum assured, then the money received from that policy will not be tax free. Many high net worth individuals (HNIs) used to pay more premium by taking less insurance so that they can take advantage of investment in the name of tax free income. So the government imposed a limit of 20% so that these policies are taken for the purpose of “insurance” and not to save tax.
4. High premium and non-death claims after 2012
If the policy is taken not as a death benefit but as a maturity or surrender value, and its premium is more than 10% of the sum assured, then tax exemption will not be available. This rule is for policies bought after 1 April 2012.
Is TDS (Tax Deducted at Source) deducted?
TDS is usually not deducted in case of death claim, but if the insurance company feels that the policy does not fall under the exemption, they can deduct 5% TDS, especially if PAN is not available.
However, if the policy is related to death claim, then this TDS is also not deducted.
Does term plan also offer tax exemption?
The only condition in term insurance plans is that the claim will be received after the death of the policyholder. This is clearly covered under Section 10(10D). This means that in a term plan also, the insurance claim amount received by the nominee is completely tax free.
Does it matter who the nominee is?
It does not matter who the nominee is. Whether the nominee is a woman or a man, the insurance claim amount is always received after the death of the policyholder. Whether the nominee is a wife, parents or children, tax exemption is available to all, provided the claim is received due to the death of the person.
Is it necessary to show it in personal tax return or not?
Although this amount is tax free, you should still show it as “Exempt Income” in your ITR (Income Tax Return). This maintains transparency and any inquiry can be avoided in the future.
You should also take all the documents and tax statements from the insurance company while taking the claim. This may also be needed in the future.
