My dad’s been paying ₹1 lakh premium every year for life insurance. It’s maturing this year, and we’re not sure if the pay out will be taxed or not. I’ve seen mixed answers online. some say it’s tax-free, others say it depends on conditions. Can someone please clarify, do we have to pay tax on life insurance maturity amount? And how do we show it in ITR?
Having a life insurance policy is one of the basic pillars of personal finance. While choosing the right policy is a topic in itself, today we’ll focus on something most people overlook — “Do you have to pay tax on your life insurance payout?”
These days, there are all kinds of life insurance products — term plans, ULIPs, endowment plans and more.
But no matter what you’ve bought, the way payouts are taxed depends mainly on two things:
- what type of policy you hold, and
- when the payout happens — on death, on maturity, or on early surrender.
Let’s break it down.
Tax on life insurance payouts
In most cases, insurance payouts are tax-free, and rightly so.
After all, life insurance is meant to give peace of mind, and the tax laws largely respect that. But there are a few conditions where tax can apply, specifically on maturity or early surrender.
Let’s look at each case.
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Payout on death of the policyholder
If the policyholder unfortunately passes away, the amount received by the nominee(s) is fully tax-free under Section 10(10D).
No conditions. No upper limits. It doesn’t matter whether it’s a term plan, a ULIP, or any other life policy. Death benefits are always exempt from tax.
-
Payout on maturity of the policy
This is where conditions come in. Your maturity proceeds will be tax-free only if the annual premium doesn’t exceed:
- 10% of the sum assured, for policies issued on or after 1 April 2012
- 20% of the sum assured, for policies issued before 1 April 2012
If you have multiple life insurance policies issued on or after 1 April 2023, the combined premium across all policies must be less than ₹5 lakh/year to keep them exempt.
-
Policy is surrendered before maturity
Sometimes, people choose to voluntarily surrender/cancel their policy before maturity, maybe because they no longer want to keep paying premiums.
In that case, the same rules as above apply. You need to check the ratio of premium paid to sum assured and the total premium of all policies should not be more than ₹5L.
For policyholders with a disability (as defined under Sec 80U) or suffering from specified diseases (under Sec 80DDB), the condition for claiming tax exemption on maturity proceeds under Section 10(10D) is relaxed — the premium paid can be up to 15% of the sum assured, instead of the usual 10% limit.”
What gets taxed: the whole amount or just the gains?
Okay this is a common question people have. And the good thing is that only your profits are taxed, and not the entire insurance payout.
By profits, I mean → maturity amount - total premiums paid
Let’s say your sum assured was ₹30 lakh.
You paid ₹6 lakh in premiums over the years.
Then, only ₹24 lakh (i.e. ₹30L – ₹6L) will be taxed, not the full ₹30 lakh.
This taxable portion will fall under ‘Income from Other Sources’ in your ITR and will be taxed at your slab rate.
What about ULIPs?
ULIPs (Unit Linked Insurance Plans) have their own set of rules.
If the total premium you pay across all ULIPs exceeds ₹2.5 lakh in any year (for policies issued on or after 1 Feb 2021), the maturity amount becomes taxable.
And the gain is not taxed as IFOS but treated as a capital gain (just like mutual funds) in this case.
Say, if the ULIP is equity-oriented, then 12.5% LTCG tax and 20% STCG tax will be applicable.
Here’s a detailed thread on taxation of ULIPs.
How are term plans taxed?
Term plans don’t have a maturity value, they only pay if the policyholder dies during the policy term. So as we discussed earlier, death payouts are always tax-free, no matter the premium amount.
How to report insurance payout in your ITR?
It depends on whether your payout is taxable or not.
- If exempt: Report it under the ‘Exempt Income’ schedule of your ITR.
- If taxable: Report under IFOS for traditional plans, and capital gains for ULIPs.
Hope this helps, feel free to drop more questions below!
You generally do not pay tax on the maturity amount received from a life insurance policy, provided it meets conditions under Section 10(10D) of the Income Tax Act. However, premiums exceeding certain limits may attract tax. Always check your policy details and consult a tax expert for clarity.
In most cases, the maturity amount from a life insurance policy is tax-free under Section 10(10D) of the Income Tax Act.
However, you may have to pay tax if:
- The annual premium is more than ₹5 lakh (for policies issued after 1 April 2023), and
- The policy is not a ULIP or not covering death risk properly.
- If the maturity amount is taxable, it will be added to your income and taxed as per your income slab.
To understand which plans are tax-free and compare tax benefits, you can visit *Policybazaar Life Insurance for easy guidance and options.
My dad invested in a LIC policy where upon maturity would get money when I turn 25. But for some reason we stopped paying the premium and told LIC to close the policy and give whatever money that they can give us till now, this was last year 2023-24, when I was 19. I got the money transferred by LIC directly to my savings bank account. So, my question is which income category does proceeds from an LIC policy fell into? And is it taxable? If taxable at what rate?
Edit: It was a children policy.
Please answer the query @TeamQuicko
Thank you.
Hey @Harsh27
The answers to your queries are as follows:
- Any consideration received from LIC will be shown under the head “Income from Other sources”
- Any consideration received from LIC is exempt from income tax if the annual premium exceeds:
a. 10% of the sum assured, for policies issued on or after 1 April 2012
b. 20% of the sum assured, for policies issued before 1 April 2012
If the above conditions are not met than the differential amount of consideration received and
the total premium paid (i.e. Consideration received - Premium paid) will be taxable under the
head “Income from other sources”. - The income will be taxable at slab rate as per the Income Tax Act, 1961.
Hope it helps!!
The maturity amount of a life insurance policy is tax-free if the premiums are within limits. You may be taxed if you go over your limits or have certain policies. Don’t get surprised by taxes! Check the conditions.