Is LIC Policy Maturity Amount Taxable or Not-converted

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Is LIC Policy Maturity Amount Taxable or Not?

• This article deals with a very confusing and
  important issue Taxability of Maturity proceeds
  received against life insurance policies. Most
  taxpayers are having a misconception that the
  maturity proceeds of a life insurance policy are
  tax-free. But it is not completely true. The
  confusion revolving around the issue becomes
  aggravated when TDS is deducted by the life
  insurance company on the maturity proceeds _at_ 5
  as prescribed under section 194DA of the Income
  Tax Act. Therefore, this article is intended to
  answer the issues confusions regarding the
  taxability of maturity proceeds of life insurance
  policies.
• Please note that the taxability of Pension
  Plans floated by life insurance companies
• is not covered by this article and shall be
  discussed by us in some other article in the
  future.

• It is a well-known fact that the amount against
  any life insurance policy can be received by the
  policyholder in the following three situations
• Death claim to the nominee in case of the death
  of the policyholder
• Maturity claims to the policyholder at the end of
  the policy term
• Surrender value in case the policy is surrendered
  before the expiry of the policy term

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There are two important points to be noted in
this regard before moving ahead in this document
(Source www.incometaxindia.gov.in ) As per
Section 10(10D) of the Income Tax Act, 1961 the
amount of sum assured plus any bonus (i.e. the
policy proceeds) paid on maturity or surrender of
policy or on death of the insured are completely
tax free for the receiver subject to certain
conditions. (Source)
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Analysis of section 10(10D) Based on a perusal
of the above provision, the following
possibilities shall prevail regarding the
taxability of maturity proceeds of life insurance
policies.
INCOME TAX ON MATURITY OF LIFE INSURANCE POLICY INCOME TAX ON MATURITY OF LIFE INSURANCE POLICY INCOME TAX ON MATURITY OF LIFE INSURANCE POLICY
Policy Issue Date Conditions attached Taxability of Maturity Amount/ surrender value
Any Date Claims including allocated bonus paid to the nominee in case of death of the policyholder 100 Exempted from Tax
Life Insurance policy issued before 01-04-2003 No conditions attached 100 Exempted from Tax
Life Insurance policy issued on or after 01-04-2003 but on or before 31-03-2012 Annual Premium exceeds 20 of actual sum assured Maturity proceeds/ surrender value received shall be taxable.
Life Insurance policy issued on or after 01-04-2003 but on or before 31-03-2012 Annual Premium up to 20 of the actual sum assured 100 exempted from tax
Life Insurance Policy issued on or after 01-04-2012 Annual Premium exceeds 10 of actual sum assured Maturity proceeds/ surrender value received shall be taxable.
Life Insurance Policy issued on or after 01-04-2012 Annual Premium up to 10 of the actual sum assured 100 exempted from tax
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Life Insurance Policy issued on or after 01-04-2013 for an nsured person who is suffering from a severe disability or disease specified n section 80U or section 80DDB of the Income Tax Act Annual Premium exceeds 15 of actual sum assured Maturity proceeds/ surrender value received shall be taxable.
We will take an example to understand the above
concept Suppose Mr. Ram took a life insurance
policy on 05-05-2012 for which the sum assured is
Rs. 30 Lakhs. The annual premium payable is Rs.
96,000. The policy is having a term of 15 years.
On maturity, the policyholder will receive Rs. 30
Lakhs plus accrued bonus. What is the tax
treatment of the policy? Solution The first
important thing to note is the date of issuance
of the policy. The policy has been issued after
01-04-2012. Annual Premium payable is less than
10 of Rs. 30 Lakhs 10 of Sum assured Rs. 30
Lakhs 10 Rs. 3 Lakhs Annual Premium Rs.
96,000 Since, the annual premium does not exceed
10 of the sum assured, therefore the entire
maturity claim receivable by Mr. Ram will be
exempted from tax. Further, a Death claim is
completely tax-free.

• Note
• The threshold limit of 10-20 is only in respect
  of policies issued on or after 01-04-2003.
  Further, in the case of death claims, the
  threshold limit of 10-20 is not relevant and
  the entire death claim is non-taxable.

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• It is to be noted that insurance premiums may be
  paid on a monthly/ quarterly/ half-yearly basis
  also. In such a case, we will have to calculate
  annualized premium for checking threshold of
  20/10 or 15. For example, the premium is paid
  Rs. 1000 quarterly then the annualized premium
  Rs. 1000 4 Rs. 4,000 shall be considered for
  checking applicability of 10 / 15 or 20.

Tax on insurance claims under Keyman Insurance
Policy It is clear from a reading of section
10(10D) that claims received under the
Keyman Insurance Policy are taxable and no
exemption is available under Income Tax Act in
respect of it.
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• Before moving ahead, you will be interested in
  knowing about the concept of Sum Assured. So,
  we shall discuss the term Sum Assured.
• What is Sum Assured?
• Explanation 2 to section 10(10D) states that- For
  the purposes of sub-clause (d), the expression
  actual capital sum assured shall have the same
  meaning assigned to in the Explanation to
  sub-section (3A) of section 80C.
• Explanation to Section 80C(3A)
• As per Explanation to Section 80C(3A), actual
  capital sum assured in relation to a life
  insurance policy shall mean the minimum amount
  assured under the policy on
• happening of the insured event at any time
  during the term of the policy, not taking into
  account-
• (i) The value of any premium agreed to be
  returned or

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(ii) Any benefit by way of bonus or otherwise
over and above the sum actually assured, which
is to be or may be received under the policy by
any person. In simple language, Sum Assured
means the amount of the policy based on which the
insurance company decides the amount of
insurance premium. Sum Assured is the amount
that is payable to the policyholder or his
nominee in the event of termination of policy
term or death of the policyholder without
including returnable premium or allocated bonus,
if any.
Budget 2021 has made an important amendment in
respect of Unit Linked Insurance Plans (ULIP)
which we will discuss in the latter part of this
article.
How to calculate the taxable amount of maturity
proceeds of a life insurance policy?
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Suppose, you have a policy with a sum assured Rs.
10 Lakhs on which premium is paid in 3 equal
installments of Rs. 2,50,000 each. Thus, you have
paid Rs. 7,50,000 in total and receive Rs. 10
Lakhs as maturity proceeds in FY 2021-22. Net
Income on the policy is 10 Lakhs- 7.50 Lakhs
i.e. Rs. 2,50,000. A question comes to our mind
whether the entire amount of Rs. 10 Lakhs will
be taxable or the net income of Rs. 2,50,000 will
be taxable.
To answer this question, we will explore the
background of the amendment made by the
Government. We will refer to Memorandum to
Finance Bill, 2003 which explains the
taxability of maturity proceeds of life insurance
policies.
The insurance policies with high premium
and minimum risk cover are similar to
deposits or bonds. To ensure that such insurance
policies are treated at par with other
investment schemes, it is proposed to rationalize
the tax concessions available to such policies.
It is, therefore, proposed to substitute the
clause (10D) of section 10, to provide that the
exemption available under the said clause shall
not be allowed on any sum received under an
insurance policy in respect of which the premium
paid in any of the years during the term of the
policy, exceeds 20 of the actual capital sum
assured. However, any sum received under such
policy on the death of a person shall continue to
be exempt.
Thus, we can draw a conclusion from the above
reading that the insurance policies with high
premium and minimum risk cover are nothing but
similar to deposits or bonds. Thus, the
taxability of such life insurance policies shall
be similar to deposits or bonds. The Explanation
as referred above makes it clear that such
insurance policies are to be treated at par with
other investment schemes. We all know that in the
case of a fixed deposit, the difference between
maturity proceeds and the principal amount is
taxable. Similarly, in the case of life
insurance policies with high premiums, the net
income i.e. difference of maturity proceeds of
insurance policy and premium paid shall be
taxable.
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Therefore, in the above example, a net income of
Rs. 2,50,000 will be taxable in the hands of the
policyholder.
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services online, click on the following link
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filing

• Head of income for tax on maturity proceeds of
  Life Insurance Policy
• In the above section of the article, we have come
  to the conclusion that net income in respect of
  high premium policies shall be taxable. But, the
  next question before us

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• is about What will be the suitable head of
  income where such income is to be shown in ITR?
• We all are aware that there are five heads of
  income in the Income Tax Act where any taxable
  income could be classified. Under the Income Tax
  Act, there is no specific head as prescribed for
  maturity proceeds of life insurance policy. So,
  net
• income from a life insurance policy should fall
  in the residual head of Income from Other
  Sources.
• However, there is one more opinion that a life
  insurance policy should be treated as a capital
  asset and thus, the income therefrom shall be
  chargeable under the head Capital Gains.
• For reaching to a conclusion, we will refer to
  CBDT Circular No. 07/2003 dated 05.09.2003 which
  stated that the insurance policies with high
  premium and minimum risk covers are similar to
  deposits or bonds. As we know, in the case of
  deposits like Fixed Deposits, only the interest
  amount is taxable under the head Income from
  Other Sources. Taking a hint from the aforesaid
  circular, we can conclude that Income from
  Other Sources will be a more appropriate head
  for the classification of income arising from
  maturity proceeds of the life insurance policy.

Tax on maturity proceeds of life insurance policy
in case of negative net income In the initial
years of life policy, the surrender value of the
life policy is generally lower as compared to the
investment made in the policy. Therefore, if a
policy is surrendered in the initial years, net
income from maturity of such policy may be
loss. Under the head Income from other
sources, there cannot be a loss and therefore
the amount of such loss incurred shall be
ignored. TDS on Life Insurance Policies
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We have made a lot of discussions above to
understand the taxability of life insurance
policies. But still, if you are stuck in a
confusion, then there is an easier way out to
decide whether maturity proceeds received on
life policy are taxable or not. Friends, there is
a provision for TDS deduction u/s 194DA of the
Income Tax Act, 1961 on the maturity proceeds of
life insurance policies. If TDS has been deducted
by the insurance company on a claim paid to you,
it means that proceeds of such policy are taxable
under Income Tax Act. For better understanding,
we shall discuss the provisions of Section 194DA
in detail. The Finance Act, 2014 inserted a new
section 194DA which prescribed for deduction of
tax at source _at_ 5 from any payment by an
insurance company to a resident person for life
policy held by such person with the company,
except in a case where the payment amount is
exempt u/s 10(10D) or does not exceed Rs. 1 Lakh
in a financial year. The payment shall include
an allocated bonus on such policy.
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services, click on the following
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iling
Section 194DA reads as follows Any person
responsible for paying to a resident any sum
under a life insurance policy including the sum
allocated by way of bonus on such policy, other
than the amount not includible in the total
income under clause (10D) of section 10, shall,
at the time of payment thereof, deduct
income-tax thereon at the rate of five percent on
the amount of income comprised therein
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Provided that no deduction under this section
shall be made where the amount of such payment
or, as the case may be, the aggregate amount of
such payments to the payee during the financial
year in less than one hundred thousand rupees.

• We can analyze section 194DA as below
• Under section 194DA, the liability to deduct TDS
  is upon the insurance company.
• TDS shall be deductible on any sum (maturity
  proceeds/ surrender value/ allocated bonus) as
  is payable against a life insurance policy.
• TDS shall not be deducted on such policies which
  are covered by the exemption under section
  10(10D) of the Income Tax Act.
• There is a threshold limit of Rs. 1 Lakh for
  deduction of TDS u/s 194DA. Even in a case where
  the proceeds of the life insurance policy are
  taxable, no TDS shall be deducted if the amount
  paid to a policyholder in a financial year does
  not exceed Rs. 1 Lakh in aggregate.
• TDS shall be deducted at the prescribed rate of
  5. In case the policyholder fails to provide
  PAN, the insurance company shall be liable to
  deduct TDS _at_ 20.

Amendment in Section 10(10D) by Finance Act
2021 Tax on ULIP (Unit Linked Insurance
Plan) An important amendment has been introduced
by Budget 2021 concerning the taxability of Unit
Linked Insurance Plans (ULIP). The effect of the
amendment is that the amount received by the
policyholder against ULIP shall be taxable in
certain cases. The amendment has been made by
inserting a proviso to Section 10(10D) of the
Income Tax Act, 1961. We will first read the
newly inserted proviso and then analyze the
effect of the same.
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Proviso to Section 10(10D) Provided also that
nothing contained in this clause shall apply with
respect to any unit-linked insurance policy,
issued on or after the st day of February 2021,
if the 1 amount of premium payable for any of the
previous years during the term of such
policy exceeds Rs. 2,50,000 Provided also that
if the premium is payable, by a person, for more
than one unit-linked insurance policy, issued
on or after the st day of February 2021, the
provisions of this 1 clause shall apply only with
respect to those unit-linked insurance policies,
where the aggregate amount of premium does not
exceed the amount referred to in the fourth
proviso in any of the previous years during the
term of any of those policies Provided also that
the provisions of the fourth and fifth provisos
shall not apply to any sum received on the death
of a person.
Analysis of amendment ULIP is a life insurance
policy that is a unit-linked plan like
equity-oriented mutual funds, having both
investment and insurance components in it.
Tax on ULIP issued till 31-01-2021 st It is to
be noted that the amount received with respect to
ULIP till 31 January 2021 is totally exempted
u/s 10(10D). This article first published on
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ax-on-maturity-proceeds-of-life-insurance-policy