Income Tax on LIC Maturity – Tax Benefit, reporting in ITR

LIC Maturity

Maturity amount is the sum of money received by a life insurance policyholder at the end of a policy term in case he/she survives the plan. Let us find out if the LIC maturity amount is taxable or not, in this post.

As per the proviso to section 10(10D) of the Income-tax Act, 1961, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, shall be taxable where policy is issued on or after 1 April 2012 and the premium payable in any of the year during the policy term, exceeds 10% of the sum assured.

But in case if life insurance is issued after 1/4/2003 but on or before 31/3/2012 and the premium payable in any year is more than 20% of actual sum assured, then the policy proceeds received would be taxable in hands of insured. And for the purpose of meaning of Assured value, it shall be the lowest amount in all the year and shall not include any bonus element. The actual sum assured shall also not include any amount of premiums which are to be returned to the policy holders.

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Therefore, For policy which has been issued on or after 1/4/2012 and the premium payable in any year is more than 10% of actual sum assured, then the policy proceeds received would be taxable in hands of insured. And in case of life insurance policy for disabled, from 1/4/2013, the premium payable in any year is more than 15% of actual sum assured, then the policy proceeds received would be taxable in hands of insured.

However, if any of such amount is received by the nominee then it shall not be taxable even if the premium paid in any previous year is more than 10%/15%/20%.

TDS on LIC Proceeds

Section 194DA says that, any amount received by an insured Indian resident from life insurer then it shall be subject to TDS @ 5% subject to condition that the amount is not exempt as discussed above. However, any proceeds received above Rs. 1,00,000 (Net of premium) shall be liable for deduction of TDS.

Read Also: Claim lower/nil TDS deduction- Form 15G, Form 15H and Form 13

Please note that in case the net income offered in FY2022-23 is lower than the taxable amount reported by the deductor, full TDS credit may be challenged by the tax authorities, which would then need to be explained basis the facts and documentation.

ITR Form for LIC Maturity

Also the applicability of the ITR form depends on various other factors, such as tax-payer’s residential status, nature of income, type of assets held, etc. during the year. Assuming you are a Salaried Person and required to fill ITR-2 for FY 2022-23, the said income should be disclosed under Schedule EI in ITR forms 2.

In case you are in business, then the same need to be reported in ITR-3 and ITR-4 under Schedule EI as ‘exempt income’.

In cases where the LIC Maturity is taxable, then the same need to be reported under Income from other Sources.

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6 Conditions Under Which LIC Maturity Amount is Taxable

Below are the conditions under which the maturity amount of LIC insurance policies are taxable –

If the sum assured of the policy is coming from a Keyman Insurance. In a keyman insurance policy, an employer gets the insurance of their employees done and also receives the claim benefit
If the nominee of the policy dies before the insured due to any already existing disability
If the life insurance policy is bought under the name of an individual who had a disability, then the maturity amount received from the LIC policy is taxable
If the policy is in the name of a person suffering from a particular disease that is mentioned under section 80DDB, the maturity amount received from the policy is taxable
If you pay 20% more insurance premium in a year as compared to the Sum Assured for a policy bought on or after April 1, 2003, your maturity amount is taxable
Also, if you pay 10% or more premium in a year as compared to the Sum Assured for a policy bought on or after 1st April 2012, your maturity benefit is taxable

For example, if you buy a life insurance policy from LIC of India with a coverage amount of INR 10 Lakh, your annual premium should be less than INR 1 Lakh to enjoy tax-free returns.

So, the maturity benefit in the above mentioned cases is added to the annual income of the insured and tax is levied on the total amount as per the tax slab that is applicable. In addition, the entire maturity benefit is levied with a 1% TDS, which is deducted from the amount before paying it to the insured by the insurer.

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3 conditions under which the LIC maturity benefit is not taxable

Apart from the conditions mentioned above, the maturity amount in the rest of the conditions come under the category of entirely tax-free.

If you pay a premium which is within 10% of the sum assured under a life insurance policy bought on or after April 1, 2012, you can enjoy full exemption of tax from the maturity amount.
Likewise, if the premium paid is within 15% of the sum assured for a life insurance policy bought for a disabled individual on or after April 1, 2003, the maturity benefit is tax-free
Also, if the premium paid is within 20% of the sum assured for policies purchased on or after April 1, 2003, the maturity amount is tax-free