After religiously paying your life insurance coverage premiums, the time might be nearing for your policy to mature. Whether it is a revenue-back or an endowment strategy, all standard life insurance coverage policies have a maturity worth to be received by the policyholder on surviving the term of the policy.
And, if you had bought the policy 10-15 or 20 years back, there have been numerous tax-connected adjustments throughout the years. So, will you be needed to spend tax on the maturity proceeds? Before we see that, let’s see what the maturity proceeds will consist of.
Life Insurance Maturity Amount
In a common standard policy, the maturity quantity comprises two elements – One is the quantity of sum assured and second is the total of bonuses accrued ( in a with-profit strategy) more than the years.
Illustratively, if you would have purchased a Rs 3 lakh policy for 20 years, by paying an annual premium of about Rs 15000, you will get the assured quantity of Rs 3 lakh on maturity. Over and above that, based on the bonus declared by the insurer throughout these 20 years, the bonus quantity gets paid on maturity.
Assuming, a bonus of Rs 45 per lakh for every single year, yearly bonus amounts to Rs 13500 and total accrued bonus following 20 years is about 2.7 lakh. So, on maturity, policyholders get Rs 3 lakh ( sum assured) plus Rs 2.7 lakh (bonus) equal to Rs 5.7 lakh.
Life Insurance Tax Rules
As per Section 10(10D) of the Income Tax Act, the sum assured received on maturity or surrender of a policy or upon the policyholder’s death is absolutely tax-no cost. Bonuses received with such an quantity are also exempt beneath Section 10(10D).
Condition
However, an significant situation has to be met ahead of availing the advantage beneath Section 10(10D) – the ratio of premium to sum assured has to be inside a certain limit as set by the revenue tax division. This ratio was modified more than the years and, hence, will depend on whether or not one has bought policy ahead of or following 1 April 2012.
Here is the situation – For policies issued following 1 April 2012, if the premium paid on the policy does not exceed 10% of the sum assured, any quantity received on maturity of a life insurance coverage policy or quantity received as bonus is totally exempt from Income Tax beneath Section 10(10D).
For policies issued ahead of 1 April 2012 (following 1.4.2003), it was 20% of sum assured, i.e. the sum assured has to be at least 20 occasions the premium
Example
So, if you are paying an annual premium (following 1 April 2012) of Rs 1 lakh, the minimum sum assured has to be kept at Rs 10 lakh. In other words, if the sum assured is Rs 10 lakh, you want to spend a minimum premium of Rs 1 lakh to hold enjoying the tax-no cost advantage on maturity. In the instance above, one might spend a reduced premium of say Rs 50,000 and but hold a sum assured of Rs 10 lakh but something above Rs 1 lakh for a sum assured of Rs 10 lakh will make the policy devoid of tax-no cost advantage.
In nutshell, the annual premium paid really should be significantly less than 10 % of the sum assured or the sum assured is at least 10 occasions the premium for policies issued following 1 April 2012.
Other Tax Benefits
As far as Section 80C is concerned, the exact same ratio requirements to be maintained so that the tax advantage might be enjoyed. Deduction is restricted to 20% of capital sum assured in respect of policies issued on or ahead of 31-3-2012 and 10% in case policies issued on or following 1-4-2012.
Therefore, though the maturity proceeds such as bonus and sum assured of standard insurance coverage plans are tax-no cost in the hands of the policyholder, topic to fulfilling the above circumstances, in the case of Ulips, there has been a current tax transform. Budget 2021 had introduced tax on gains made in Ulips issued on or following February 1, 2021 with an annual premium of Rs 2.5 lakh, the return on maturity shall be treated as Capital Gain and charged accordingly beneath section 112A.