Term Insurance Tax Implications

Each family has at least one person who bought a term insurance India. It could be anything like unit linked insurance plan, pension plan or a traditional term insurance policy. Generally, majority of people are purchased these term plan just for getting tax benefits under section 80C. According to section 80C, condition for eligibility is that premium amount should not more than 10 percent of the sum assured.

In fact, people purchase these plans in a hurry before the end of fiscal year. Before purchasing term insurance India online, people only think about the maturity value or tax benefits. They completely forget to think about the taxation aspect of these plans. Below is some information about how these plans are taxed when surrendered before maturity and when kept till maturity:

  • Taxability of ULIP/Traditional Plans

ULIP plans and traditional policies are taxed in the same way. It involves three cases wherein taxation comes into consideration for policies, policyholder’s death, maturity time or surrendering the policy before maturity.

In case of insured person’s death, policy proceeds received by members of the family and are completely tax exempt under section 10 of income tax act. But, family needs to submit the death certificate to the insurance company in India along with all necessary documents and then claim the insurance amount directly.

If insured person surrender the policy before maturity, then taxability would depends on whether policyholder has paid five premiums or not. If answer is ‘yes’, then taxability would be zero. Else, the surrender value will be added to policyholder’s annual income and then taxed accordingly. Maturity proceeds are tax free only if policyholder continues the insurance till maturity.

  • Taxability on Pension Plans

These plans are taxed in a fully different way than ULIPs and traditional policies. Insurers consider three scenarios when it comes to pension plan taxation. The benefits received by the member of family upon policyholder’s death is tax free under section 10(10D). If policyholder decides to surrender his policy before maturity has tax implications.

Under this policy, premiums that insured have claimed as part of deduction under section 80C will be reversed and policyholders need to pay tax on it as per insured person’s tax slab. According to new IRDA rules, two third of the surrender value received must be used to buy annuity plan.

Under pension plans, the maturity proceeds are eligible for tax benefits but only up to one third of the insurance amount. As mentioned by Insurance Regulatory and Development Authority, remaining two third of the maturity money should be used to buy annuity plans.

This information clearly shows that there are different ways in which term insurance for whole life are taxed. Before buying any insurance product online, remember to keep in mind the taxation factor also. Do not forget to carefully read all the terms and conditions about term insurance taxability because of these plans could have more tax implications. So, it is good to avoid shocking surprises in such scenarios.