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How Life Insurance Are Taxed?

Published On Feb 02, 2023 10:15 AM By InsuranceDekho

Uncertainties follow us everywhere we go, whether we're travelling to work or are on a  vacation. Mishaps that result in death are accompanied by emotional and mental stress for our loved ones. A life insurance policy serves as a safety net for your family in case of your absence. In addition to providing death and maturity benefits, a life insurance policy also provides numerous tax benefits to the policyholders. Henceforth, it is also considered a tax-saving financial instrument. Let us now discuss how life insurance policies are taxed. 

How Life Insurance Are Taxed

How Are Life Insurance Policies Taxed? 

According to the Income Tax Act of 1961, life insurance policyholders can avail themselves of tax advantages at different stages of their policy. 

  • Entry Advantage: The life assured is eligible for tax benefits on the premium payments under Section 80C for life insurance, Section 80CCC for pension, and Section 80D for health. Tax benefit up to Rs.1.5 lakh
  • Earning Advantage: The investment of the life assured is secured with an insurance company that has the potential to grow and currently is non-taxable. 
  • Exclusive Switching Advantage: The life assured can make the tax-free switch between equity, debt, and balanced funds anytime. 
  • Exit Advantage: The maturity benefit received when your policy ends is tax-free and subjected to the conditions of Section 10 (10D) of the Income Tax Act of 1961. Even the nominee is eligible to receive tax exemption on the coverage amount in case of unfortunate death of the life assured. 

Considerable Taxability Instances of Life Insurance 

While purchasing a suitable life insurance policy, ensure that you understand life insurance tax exemptions and deductions thoroughly. The necessary taxable instances of life insurance that you should be aware of are listed in the section below.

  • Deduction Under Section 80C: 

Any policy issued on or after April 1, 2012, where in the premium premium paid for yourself, your spouse, and your children that is less than 10% of the sum assured is eligible for tax deduction under Section 80C of the Income Tax Act of 1961. 

  • Exemption Under Section 10(10D): 

Under Section 10(10D) of the Income Tax Act, the life assured can claim a tax exemption on the maturity benefit and bonuses received from your life insurance plans. However, you will be eligible only if the premium paid does not exceed 20% of the sum assured for all policies issued before April 1, 2012, and 10% for those issued after this date. 

  • When the Maturity Benefit is Taxable: 

In certain circumstances, Section 10(10D) does not apply to maturity benefits. You will not receive tax benefits if the policy is issued after April 1, 2012, and the premium paid towards the life insurance policy exceeds 10% of the sum assured. However, for policies purchased prior to April 1, 2012, the policyholder cannot claim a tax exemption if the premium paid is 20% higher than the sum assured. 

  • TDS on Life Insurance Policy: 

Starting from October 2014, if the life insurance benefit amount exceeds Rs. 1 lakh, the insurance companies are eligible to impose a 1% TDS on life insurance benefits. However, in the 2019 Union Budget, the TDS rate was increased to 5%. Furthermore, you are eligible to receive TDS credit from the insurer when you file your income tax return. 

  • Taxation Under Single Premium Life Insurance Plans: 

The maturity benefit under single-premium life insurance policies is taxable because the premium paid is often higher than 10% of the sum assured. For instance,  For example, if you purchased insurance with a maturity value of 1.1 lakh on September 16, 2013, the single premium would be around 45,000, which is more than 10% of the total insured. The insurer would levy 5% TDS on the net maturity funds if you surrendered the policy on September 16, 2019.


A life insurance policy guards you and your family against any financial obligations that may arise in the future. When purchasing life insurance, you must adhere to the above-mentioned tax implications to claim tax benefits.

Also Read: 

How Much Does 2 Crore Term Insurance Cost


This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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