Life insurance is not just a way to protect your family’s financial future—it also comes with valuable tax benefits in India. The government encourages individuals to invest in life insurance by offering tax exemptions on both premium payments and payouts under specific sections of the Income Tax Act of 1961. These exemptions help policyholders benefit from paying taxes while ensuring financial security for their loved ones.
However, before purchasing any life insurance policy, it is important to understand what a life insurance tax exemption is, what types of life insurance policies are eligible for tax exemptions, who is eligible, and what conditions apply to claim tax exemptions.
In this blog, we will break down the key tax exemptions available on life insurance in India, the relevant sections of the Income Tax Act, and vital factors to keep in mind when claiming these benefits.
What is Life Insurance?
Life insurance is a contract between the insurer (Insurance Company) and the policyholder. The insurer guarantees that it will pay a certain sum of money to the policyholder’s beneficiaries in case of their death.
What is Life Insurance Tax Exemption?
Life insurance tax exemption refers to the deductions and exemptions available on life insurance premiums, maturity proceeds, and death benefits under the Income Tax Act of 1961. These benefits help individuals lower their taxable income and encourage investment in financial security. Money is received in life insurance in three scenarios:
- Death
- Maturity of Policy
- Surrender of Policy
Under section 10(10D) of the Income Tax Act, 1961, any sum received under the Life Insurance Policy is exempted from taxation. The eligibility criteria are as follows:
Types of Life Insurance Policies Eligible for Tax Exemptions
- Term Insurance:Â Entire life cover policies qualify for deductions under Section 80C.
- Unit-Linked Insurance Plans (ULIPs): These plans provide both investment and insurance benefits, with tax benefits under Section 80C and 10(10D) of the Income Tax Act, 1961.
- Endowment Plans: These offer savings and insurance benefits, with tax exemptions on both premiums and maturity payouts.
- Money-Back Policies: These provide periodic payouts during the policy term, and maturity proceeds are tax-free under Section 10(10D) of the Income Tax Act, 1961.
- Whole Life Insurance: It covers the policyholder for their lifetime, and the death benefit is tax-exempt by the Income Tax Act of 1961.
Who Can Claim Tax Exemptions on Life Insurance?
- Individuals – Salaried and self-employed individuals who have taken life insurance for themselves, spouses, or children.
- Hindu Undivided Families (HUFs) – HUFs can claim deductions under Section 80C.
- Corporate Entities – Companies providing group life insurance for employees can claim tax benefits under business expenses.
Tax Benefits on Life Insurance Premiums
The premiums paid for life insurance policies qualify for tax deductions under Section 80C of the Income Tax Act.
- Maximum Deduction Limit: You can claim a deduction of up to ₹1.5 lakh per financial year on premiums paid.
- Eligible Policies: Policies issued in the name of the taxpayer, spouse, or children (dependent or independent) are eligible.
- Premium-to-Sum Assured Ratio: For life insurance policies purchased after April 1, 2012, the deduction is allowed only if the annual premium does not exceed 10% of the sum assured.
- Hindu Undivided Families (HUFs): HUFs can also claim deductions for life insurance premiums paid for family members
Tax Benefits on Maturity
Apart from deductions on premiums, the maturity benefits from life insurance regular endowment policies are tax-free under Section 10(10D); the eligibility criteria are as follows:
| Policy Year | Premium | Tax Exemption |
| 2003 to 1st April 2012 | If the annual premium is more than 20% of the sum assured under the policy | The maturity amount of the policy is not qualified for tax exemption. |
| 2003 to 1st April 2012 | If the annual premium is less than 20% of the sum assured under the policy | The maturity amount is qualified for tax exemption. |
| Policy Year | Premium | Tax Exemption |
| After 1st April 2012 to 2023 | If the annual premium is more than 10% of the sum assured under the policy | The maturity amount of the policy is not qualified for tax exemption. |
| After 1st April 2012 to 2023 | If the annual premium is less than 10% of the sum assured under the policy | The maturity amount is qualified for tax exemption. |
For Disabled Persons:
| Policy Year | Premium | Tax Exemption |
| After 1st April 2012 to 2023 | If the annual premium is more than 15% of the sum assured under the policy | The maturity amount of the policy is not qualified for tax exemption. |
| After 1st April 2012 to 2023 | If the annual premium is less than 15% of the sum assured under the policy | The maturity amount is qualified for tax exemption. |
| Policy Year | Premium | Tax Exemption |
| After 2023 | If the annual premium is more than Rs. 5 lakhs a year | The maturity amount of the policy is not qualified for tax exemption. |
| After 2023 | If the annual premium is less than Rs. 5 lakhs a year | The maturity amount is qualified for tax exemption. |
Tax Benefits in Case of Death of the Policyholder
If a life insurance policyholder passes away, the amount received by the nominee (death benefit) is entirely tax-free, regardless of the sum assured or the premium paid.
Exception to the Tax-Free Rule
There is a key exception: If the policyholder had claimed tax deductions under Section 80DD or 80DDA (which cover medical expenses for dependents with disabilities) of the Income Tax Act, 1961, then the death benefit might not be entirely tax-free under Section 10(10D) of the Income Tax Act, 1961.
Taxation on Surrendered Policies
If you surrender (close) your life insurance policy before the required lock-in period, there could be tax implications:
- For ULIPs (Unit Linked Insurance Plans): The lock-in period is 5 years.
- For Traditional Life Insurance Policies: The lock-in period is 2 years.
If you surrender the policy too early, any tax deductions you previously claimed under Section 80C of the Income Tax Act, 1961, can be reversed, and the surrender value (the amount you get back) may be taxed as income.
GST on Life Insurance Premiums
While life insurance premiums qualify for tax deductions, they also attract Goods and Services Tax (GST) at different rates, which are:
- Term Insurance → 18% GST on the premium.
- ULIPs → 18% GST on mortality charges (cost of insurance within ULIPs).
- Traditional Life Insurance Policies → 4.5% GST on the first-year premium and 2.25% GST on renewal premiums.
- Single-Premium Policies → 1.8% GST on the total premium.
Important Tax Points to Remember
✔ Section 80C Tax Benefits Have a Limit: The maximum deduction allowed under Section 80C is ₹1.5 lakh per year. It includes other investments like PPF, EPF, ELSS, and home loan principal repayment.
✔ High Premium Policies May Not Get Tax Exemptions: If your annual premium is more than Rs. 5 lakhs a year, the maturity proceeds are not tax-free under Section 10(10D) of the Income Tax Act, 1961.
✔ Maintain the Minimum Lock-in Period: If your policy doesn’t stay active for the required period, you may lose the tax benefits you had already claimed.
✔ Tax Laws Change: Law is an ever-evolving subject, especially tax laws. It may be updated from time to time, so it is advisable to check with a tax expert before making decisions based on exemptions.
Conclusion
Life insurance provides financial security to your loved ones by offering financial assistance and tax-saving opportunities during the life span as well as the death of the policyholder. Selecting the right life insurance plan with tax implications in mind can be a smart strategy for long-term financial planning.
The Indian Income Tax Act of 1961 provides tax deductions on life insurance premiums under Section 80C and tax-free maturity or death benefits under Section 10(10D). By understanding and using these provisions, policyholders can effectively reduce their taxable income and optimise their savings. Furthermore, it is important to be aware of these advantages, which help in making informed decisions that align with both financial security and tax efficiency.
Choosing the right life insurance policy while considering its tax implications can significantly impact long-term financial planning.
Related Services
Frequently Answered Questions
1. How much tax deduction can I claim on life insurance premiums?
You can claim up to ₹1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961.
2. Are maturity proceeds of life insurance policies taxable?
No, maturity proceeds are tax-free under Section 10(10D), provided conditions are met.
3. Can I claim tax benefits for my spouse’s or child’s life insurance policy?
Yes, you can claim deductions for premiums paid on policies held by your spouse or children.
4. Does term insurance also qualify for tax exemption?
Yes, term insurance premiums qualify under Section 80C, and death benefits are tax-free under Section 10(10D) of the Income Tax Act of 1961.
5. Is GST applicable to life insurance policies?
Yes, different GST rates apply depending on the type of life insurance policy.
6. What happens if I surrender my life insurance policy early?
If surrendered before the lock-in period, tax benefits under Section 80C may be reversed
7. Can companies claim tax benefits on life insurance policies?
Yes, companies can claim deductions if they provide group life insurance as a business expense.
