Life insurance income tax above Rs 5 lakh: On August 16th, 2023, the Income Tax department prescribed a method for calculating income proceeds from life insurance policies where the total annual premium exceeds Rs 5 lakh. The Central Board of Direct Taxes (CBDT) has published the Income Tax Amendment (Sixteenth Amendment), Rules, 2023, which specifies rule 11UACA for calculating income with respect to the sum received upon maturity of life insurance policies wherein the amount of premiums exceeds Rs 5 lakh and such policies are issued on or after April 1, 2023.
The tax exemption on maturity benefits under Section 10(10D) will only be applicable for policies issued on or after April 1, 2023, if the total premiums paid by an individual per year do not exceed Rs 5 lakh. For premiums beyond this limit, the proceeds will be added to the income and taxed at applicable rates.
The change in tax provision with regard to life insurance policies, except ULIP, was announced in the Union Budget 2023-24.
Section 10(10D) of the Income Tax Act
A resident individual may be eligible for tax exemptions under Section 10(10D) of the Income Tax Act of 1961 on the assured sum and any accrued bonus they receive from life insurance plan payouts (death or maturity benefits), if any. This tax exemption also applies to the profits made from ULIPs, or Unique Linked Insurance Plans. Additionally, it can be found on all claim forms for life insurance policies.
These tax exemptions apply to Hindu Undivided Families (HUFs), as well as to salaried and unwaged people, corporations, foreign businesses, bodies of persons, and others.
Starting from the assessment year 2024-25, sums received from life insurance policies—excluding unit-linked insurance policies—issued on or after April 1, 2023, will no longer be exempt if the premium payable for any previous year during the policy’s term exceeds Rs 5 lakh.
Additionally, in cases where premiums are payable for multiple life insurance policies (excluding unit-linked insurance policies) issued post April 1, 2023, exemption under the mentioned clause will apply only to policies where the total premium doesn’t exceed Rs 5 lakh for any previous year during the policy’s tenure.
However, these provisions will not be applicable in cases of sums received upon an individual’s demise.
Eligibility Criteria for tax deduction for Life insurance:
Here are a few conditions which you must fulfil to be eligible for claiming tax deductions :
- Tax deductions under this section are applicable to every type of life insurance claim payouts.
- Tax deductions under this section is available for life insurance claim amounts like maturity and death benefit, including all the accrued bonuses.
- There is no limit to the tax benefits that can be availed u/s 10(10D) of the Income Tax Act, 1961.
- Deductions are applicable to both Indian and foreign life insurance companies.
Tax deduction on Life Insurance Plan
If the life insurance policy premiums paid in a single policy year do not exceed 20%* (amount assured for an insurance policy purchased between April 1, 2003, and March 31, 2012), you are eligible to claim the tax deduction of premium paid.
You must note that if the life insurance policy is bought after April 1, 2012, the amount of premium should not be more than 10% of assured sum. If you are a policyholder who is suffering from diseases or are severely disabled, the tax exemption on an insurance policy purchased before April 1, 2013, shall not exceed 15% of assured sum.
In case of person suffering from disability or severe disability referred to in section 80U/80DDB, then : Premium paid or 15% of capital sum assured.
The maximum deduction u/s 80C (along with deduction u/s 80CCC & 80CCD) allowed is up to Rs. 1,50,000 in a year.
TDS on a Life Insurance Policy
If the amount received from your life insurance plan exceeds Rs. 1,00,000 on those policies which don’t fall under exemption u/s 10(10D), the TDS shall be deducted at 1% by the insurance provider prior to the payment. The TDS deduction also takes place on the bonus payments. Besides, if the received amount is below Rs. 1,00,000, no TDS will be deducted. This amount is totally taxable and you can also claim credits for TDS deductions through your Income Tax Return filings.
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