Life Insurance Policy Maturity Amount Tax Rule: Be it money back or endowment plans, all traditional life insurance policies have a maturity value. It is available to the insured at the time of maturity at the time of termination of the policy. If you have bought a policy years ago like 10-20 years ago, then there have been significant tax related changes in these years. In such a situation, it is very important to know that what will be your tax liability on the money you get at the time of maturity? Before understanding this, it is important to know how the maturity amount is decided.
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Two parts in the maturity amount of life insurance
The maturity amount that is received after the maturity of the traditional policy consists of two parts. One is the sum assured and the other bonus accrued during the term of the policy. Let us understand this with an example- Suppose you have bought a policy of Rs 3 lakh for 20 years. Its annual premium is 15 thousand rupees. At the time of maturity, you will get the sum assured i.e. Rs 3 lakh. Apart from this, the bonus declared by the insurance company in these 20 years will be given at the time of maturity. Suppose the insurance company has declared a bonus of Rs 45 per lakh for every year then the bonus on 13500 in a year will be Rs 2.7 lakh for 20 years i.e. on maturity you will get Rs 5.7 lakh (Rs 3 lakh + 2.7 lakh Rs.) will be available.
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This is the rule regarding tax on maturity amount
Under Section 10(10D) of the Income Tax Act, the sum assured on maturity or surrender or death of the insured is completely tax free. The benefit of tax exemption is also available on the amount of bonus under section 10(10D). However, in order to avail the tax benefits under section 10(10D), certain conditions have to be fulfilled regarding the ratio of premium and sum assured. This ratio is revised from time to time. As per the current rules, a policy that is purchased after April 1, 2012, will get full tax exemption on the maturity amount only if its premium is less than 10 per cent of the sum assured. This ratio is 20 per cent for policies purchased before 1 April 2012 (after 1 April 2003). For example- If you are paying an annual premium of Rs 1 lakh after April 1, 2012, then the minimum sum assured should be Rs 10 lakh to get tax benefit on maturity.
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Other Tax Benefits
- The ratio of premium and sum assured is also considered for availing tax deduction under section 80C. Policy purchased after April 1, 2012, if the ratio of premium and sum assured is less than 10 per cent and for policies older than this, the amount of deduction is less than 20 per cent.
- In the case of ULIPs, there have been changes in the tax rules in Budget 2021. Profits on ULIPs issued on or after February 1, 2021 with an annual premium of Rs 2.5 lakh will be treated as capital gains and will attract tax liability under section 112A.
(Article: Sunil Dhawan)