A life insurance claim received after the death of a loved one holds great importance, both emotionally and financially.
However, many people are confused about whether the insurance amount is entirely tax-free or if taxes apply.
Let’s break down the tax rules regarding life insurance claims after death, when exemptions apply, and when taxes may be due.
Rules on Tax for Insurance Claims
Under Section 10(10D) of the Income Tax Act, the amount received by a nominee after the policyholder’s death is completely tax-free.
This means that if you receive Rs 25 lakh, Rs 50 lakh, or even Rs 1 crore as a nominee, you do not need to pay tax on it.
When Is the Insurance Claim Not Tax-Free?
In most cases, life insurance proceeds are exempt from income tax if they meet the criteria of Section 10(10D).
However, there are certain situations where this exemption does not apply. Let’s explore when the insurance claim is not tax-free:
Keyman Insurance Policy Payouts
If a company buys a Keyman Insurance Policy for a key employee, and the company receives the payout after the employee’s death, this amount is not tax-free.
The benefit goes to the company, not the deceased’s family, so it does not fall under Section 10(10D).
Payments Under Section 80DD(3) or 80DDA(3)
If a policy payout is received after the death of a disabled person under Section 80DD(3) or 80DDA(3), it is not tax-free.
These payments are considered as a fixed investment (a deposit with conditions) rather than a death benefit.
Policies Bought Between 2003 and 2012
If a policy was bought between April 1, 2003, and March 31, 2012, and the annual premium exceeds 20% of the sum assured, the amount received from that policy will not be tax-free.
The government set this limit to prevent high-net-worth individuals from using insurance as a tax-saving tool by paying high premiums. The policy must be for genuine insurance, not for tax saving.
High Premium and Non-Death Claims After 2012
For policies bought after April 1, 2012, if the policy is designed for maturity or surrender value and the premium exceeds 10% of the sum assured, the payout will not be tax-free.
This rule applies to policies purchased for investment purposes, not as a death benefit.
Is TDS (Tax Deducted at Source) Deducted?
TDS is generally not deducted on death claims. However, if the insurance company believes the policy does not meet the tax exemptions, it may deduct 5% TDS, especially if the PAN is not available.
For death claims, TDS is not deducted, even if the PAN is missing.
Does the Term Plan Also Get Tax Exemption?
A term insurance plan qualifies for the same tax exemption as other life insurance policies.
As long as the claim is received after the death of the policyholder, it is covered under Section 10(10D), meaning the nominee’s insurance claim is completely tax-free.
Does the Nominee’s Identity Matter?
It doesn’t matter whether the nominee is male or female. The tax exemption applies equally to all nominees—whether it’s the spouse, children, or parents—as long as the claim is made due to the policyholder’s death.
Is It Necessary to Show the Claim in Your Tax Return?
Although life insurance claims are tax-free, it’s a good practice to declare the amount as “Exempt Income” in your Income Tax Return (ITR). This helps maintain transparency and can avoid future inquiries.
Make sure to keep all documents and tax statements from the insurance company when claiming the amount. These may be needed later for reference.
