Does Your Life Insurance Offers Tax Benefit?

Tax Benefit and TDS on Life Insurance

Tax Benefit and TDS on Life Insurance

We are at the end of Financial year and all life insurance companies have launched some new plans to cash in the last minute “tax saving” frenzy.

But do you know that some of life insurance policies might not give you the desired tax benefit both at the time of investment and also at the time of maturity.

Eligibility for Life Insurance policy to get Tax Benefit?

The tax benefits for Life Insurance are at two stages:

  • While investing, the investment is exempted up to Rs 1.5 Lakhs as part of section 80C
  • At the time of maturity, the maturity amount paid to the survivor u/s 10(10D) is tax free

But Budget 2012 put on following conditions for Life Insurance policies to qualify for the above tax benefits:

  1. Only insurance policies which have sum assured of more than 10 times the annual premium paid would be eligible for Tax Benefit u/s 10(10D) at the time of maturity payment.
  2. At the time of investment the tax benefit would be limited to minimum of (annual premium paid, 10% of Sum Assured, Rs 1,50,000) u/s 80C.

This change is for all Life Insurance Policies bought after March 31, 2012.

Also Read: Life Insurance Death Claim Settlement Ratio for FY 2013-14


As a special case for life insurance of the disabled and those suffering from ailments, the annual premium can be less than 15% of the sum assured – i.e. – Sum assured should be greater than 6.67 times the annual premium. This change was made in Budget 2013.

Also Budget 2014 has mandated 2% 1% (effective June 1, 2016) TDS on the amount payable at maturity under Section  194DA for all payments greater than Rs 1 lakh. So this taxation is getting stricter and trackable.

Budget 2015 has introduced the facility to fill Form 15G/15H in case your annual income is less than the minimum taxable limit and you don’t want TDS deducted on Life Insurance maturity payment. This would be effective from June 1, 2015.

The above changes in tax laws applies to all kind of Life Insurance Policies, be it ULIP, Endowment Plan or Return of Premium Plans.

In case the Life Insurance does not qualify for tax benefit as above u/s 10(10D), the income received at the time of maturity on survival would be added to your income and taxed to your marginal tax rate.

You need not worry about the Term Insurance as the Sum Assured is always more than 10 times the annual premium paid. But if you are investing in ULIPs, Endowment Plan or Return of Premium Plans you need to do a thorough check.

There might also be cases where a Life Insurance policy can be Tax Free for only a selected group of investors.

An Example:

Take example of HDFC Standard Life Insurance online ULIP – HDFC Click2Invest. In this case the investors opting for Single Premium would not get tax benefit u/s 10(10D) as the sum assured is only 1.25X of annual premium paid.

Also investors with age more than 55 years would not get any tax benefit at the time of maturity as the sum assured is only 7X of annual premium paid.

However they would get limited tax benefit u/s 80C using the following formula: minimum of (annual premium paid, 10% of Sum Assured, Rs 1,50,000)

Only investors opting for regular premium payment and aged less than 55 years would get full tax benefit both at the time of investment and at the time of maturity.

Do check and recheck before investing in these plans!

Remember Life Insurance should be an “expense” to cover the risk of your life and never an “Investment”.

56 thoughts on “Does Your Life Insurance Offers Tax Benefit?

  1. I took a LIC policy for US$6,000 on 28-11-2005 from their Bahrain operation, while working in Saudi Arabia.In 2009, I became a resident of India and transferred the policy to India at the then existing exchange rate of 46.71 Rs = 1 US$. This policy got matured on 28-11-2015 and the LIC deducted Rs 7,354/- from the final payment. When I took the Policy, I was verbally assured that the final payment will be Tax Free but now I understand the total payment of this Policy is Taxable income. Kindly advise

    Regards, Jacob

    • Sorry to hear that. The miss-selling problem is rampant in insurance industry and unfortunately you are one of the victims of the same. Verbal promises means nothing. So you have to ideally pay taxes on your maturity!

  2. Hi I have taken an endowment plan for 10 years premium & policy term is also 10 years. I am 53 years old & in starting my sum assured is less than 10 times of 1st year premium but at maturity my sum assured increases to more than 10 times. I want to know in my policy will i get the tax benefit under 10(10D) at maturity or not.

    • Sum assured and maturity benefit are two different things. In most cases Maturity benefit = sum Assured + Bonus. What I can make out from your query is your sum assured is less than 10X of premium paid and hence your maturity amount would be taxable.

  3. My father had a ULPP which he surrender after 5 annual premium payments of rs 15000.tds on the same is deducted u/s 194DA @2%on surrender value. Please tell me why it is taxable and amount of taxable income, under which head taxable. If surrender value is rs 110000(approx.)

    • Also he has not taken the benefit under 80C/80CCC in any of these 5 years. Policy taken in 2010.

    • All money received as surrender value of ULPP is fully taxable. So a TDS of 2% has been deducted. While filing tax return, you should show the surrender amount in “Income from other sources”.

  4. HI Amit,

    I have ICICI Pru life – Lifetime ULIP – policy taken in 2006, sum assured 15Lakshs and premium is 1 lakh per annum. I have paid 3 continuous preimuns from 2006, 2007, 2008 and stopped paying after that. Since the fund has not grown much and i feel like surrendering and investing elsewhere.. Will there be Tax on the surrender value, that i receive.

    Can you please advice

    Thanks & regards,

    • As the policy is being surrendered after 3 years and also the sum assured is 15X of annual premium, the surrender amount would be tax free

  5. If I have not availed 80(c) exemption for the payment of premium for purchase Ulip, is it still taxable at the time of maturity?

    • ULIPs maturity is taxable or not depends on the sum assured and the premium paid which you can check in the post. It does not matter if you have taken 80C exemption or not.

  6. whether NRI is eligible for tax deduction.his sum assured is Rs.1000000 and is premium is Rs.2000000.please explain

    • The sum assured is just twice the annual premium, so the maturity amount would be taxable. The insurance tax benefits does not depend on residency status of individuals – so its irrespective of you being NRI.

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