How to avoid tax on life insurance claims?

Life insurance policy is one of the best ways to build a financial safety net for your loved ones. The sum assured can help your family build a safe and safeguarded future, even if you are not there. You have plenty of options when it comes to taking up a life insurance policy, however; you need to know that while the proceeds are essentially tax-free lump sums of money, there are specific situations when they are subject to taxation.


If you are unaware of such situations, this post will help you understand everything you need to know about avoiding tax on life insurance claims.

Is life insurance taxable?

The general impression amongst people is that the sum assured of the life insurance policies are completely tax-free. However, whether the policy is taxable or not is actually subject to some exceptions and also certain conditions. Therefore, it is vital for the individual to be aware of when the sum assured tax-free, and when not.

The proceeds along with any bonus paid on the death of the insured, surrender of the policy, or maturity are completely tax-free for the beneficiary subject to certain conditions.

According to the Income Tax Act, 1961, Section 10 (10D).

The sum assured will be taxable in the following situations:

According to Section 10 (10D), for a life insurance policy issued before 31.3.20212 or after 1.4.2003 with a premium payable exceeding 20% of the actual sum assured, it would be taxable. For life insurance policies that are issued after 1.4.2012, the premium payable limit has been changed from 20% to 10%.

If you suffer from a disease or severe disability as specified by the Income Tax Act, and your policy was issued after 1.4.2013, then your limit will be increased to 15%. The disability or disease you have must be one of those specified in Rule 11DD in section 80DDB.

On the other hand, if the premium payable exceeds the prescribed percentage of the actual sum assured, that is; 10%, 15%, or 20%, then the sum assured will be taxed. In case of the death of the insured, then his/her nominees will receive the sum assured. At this time, it will be tax-free, even if the premium paid exceeds the prescribed percentage.

The other cases where life insurance policy becomes taxable is in the form of inheritance and estate tax. In some cases, the sum assured from the policy is issued to the estate of the deceased. This is when there is no beneficiary named by the policyholder or when the beneficiary dies before the policyholder. It is a rare instance, but once the sum assured becomes a part of the estate, it becomes subject to inheritance tax.

You will have to take care of all the possible scenarios mentioned above in order to avoid taxation on your life insurance claim. You can consult your policy provider regarding the same and gain knowledge about the taxability of life insurance.

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