TAXATION ON MATURITY OF INSURANCE POLICY

Many people buy insurance policies just to save on taxes. But this is not advisable as the real purpose of insurance is to secure your dependents financially.
The tax benefits, which are often the most-discussed aspect of insurance policies, are actually a positive side to those policies and not the main benefit. And since an insurance policy is an important aspect of our financial lives and those of our dependents, it is important to understand all the aspects of it. So, we should not focus only on tax benefits available under Section 80C, but we should also focus on how the maturity amount is taxed later under Section 10(10D).

Section 10(10D) of Income Tax Act, 1961

The amount of sum assured and any bonus i.e. the policy proceeds paid on maturity or surrender of policy or on the death of the insured are completely tax-free for the recipient subject to certain conditions. These policy proceeds will be taxable in the hands of the insured in the following situations:

• In case of an insurance policy issued after 1.4.2003 but on or before 31.3.2012
  If the premium payable in any year exceeds 20% of the actual sum assured, then the
  policy proceeds would be taxable in the hands of the insured.
• For policies issued on or after 1.4.2012
  If the premium payable in any year exceeds 10% of the actual sum assured, then the policy proceeds would be taxable in the hands of the insured.
• In case the insured suffers from severe disability or disease as specified by the Income Tax Act and Rules and his/her policy was issued on or after 1.4.2013
  For these types of persons, the limit of 10% will be increased to 15% i.e. If the premium payable in any year exceeds 15% of the actual sum assured, then the policy proceeds would be taxable in the hands of the insured. For this purpose, disability has to be one of those specified in section 80U and disease has to be one of those specified in section 80DDB read with Rule 11DD of Income Tax Rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

In case the premium payable in any year exceeds the limit i.e. 10%, 15% or 20% of the actual sum assured, as described above, then the whole proceeds from the insurance policy would be taxable in the year of receipt. However, in case of death of the insured, where his nominee(s) receive the policy proceeds the same shall be tax-free in the hands of the nominee(s) even if the premium paid in any year crosses the prescribed percentage of the sum assured.