The life insurance claim received after the death of a loved one is very important both from an emotional and financial point of view. But one question that confuses many people is whether this amount is completely tax-free or if there is any tax on it. So, if you ever face such a situation, then know what the income tax rules say.
Tax rules on insurance claims
Under Section 10(10D) of the Income Tax Act, the amount received by the nominee after the death of an insured person is completely tax-free. This means that if you receive ₹25 lakh, ₹50 lakh or even ₹1 crore as a nominee, the Income Tax Department does not levy any tax on it. This news is a sigh of relief for those who are worried about financial security after the death of their loved ones.
When you do not get the benefit of a tax-free insurance claim
Generally, income tax is not levied on the money received from life insurance, if the payment is covered under Section 10(10D) of the Income Tax Act. However, there are some situations in which this exemption is not available. Let’s understand when the insurance claim is not tax-free.
Payment of Keyman Insurance Policy
If a company buys a Keyman Insurance Policy in the name of one of its important employees and later the amount received from it is given to the company, then it is not tax-free. Because in this the company gets the benefit, not the family of the deceased. Therefore, it is not covered under Section 10(10D).
Payments under section 80DD(3) or 80DDA(3)
If the payment under a policy is received on the death of a disabled person, and it comes under section 80DD(3) or 80DDA(3), then it is also exempted from the tax exemption of 10(10D). This payment is not considered a death benefit but a kind of fixed investment.
Policies between 2003 and 2012
If you have bought a policy between 1 April 2003 and 31 March 2012 and the annual premium is more than 20% of the sum assured, then the money received from that policy will not be tax-free. This was because High Net Worth Individuals (HNIs) used to take less insurance and pay more premiums so that they could take advantage of investment in the name of tax-free income. Hence, the government imposed a limit of 20% so that these policies are bought for “insurance” and not to save tax.
Higher premiums and non-death claims after 2012
If the policy is bought for maturity or surrender value and not for the death benefit, and the premium is more than 10% of the sum assured, then tax exemption will not be available. This rule is for policies bought after 1st April 2012.
You need to know this so that you do not face any problem while making a claim.
Is TDS (Tax Deducted at Source) deducted
Normally, TDS is not deducted in case of death claims, but if the insurance company feels that the policy does not fall under exemption, they may deduct 5% TDS, especially if PAN is not available. However, if the policy is related to a death claim, then this TDS is also not deducted. Hence, make sure to provide your PAN details while making a claim.
Does tax exemption come in term plans too
The only condition in term insurance plans is that the claim will be received after the death of the policyholder. This is covered under section 10(10D). This means that the claim amount received by the nominee in the term plan is completely tax-free. This is a big relief news for those who take term plans only for the purpose of protection.
Does the relationship of the nominee make any difference
It does not matter who the nominee is. Whether the nominee is a woman or a man, the insurance claim amount after the death of the policyholder is always tax-free. Whether the nominee is a wife, parents or children, everyone gets exemption, provided the claim is received due to the death of the person. This rule applies equally to all nominees.
Is it necessary to show it in a personal return
Although this amount is tax-free, you should still show it as “Exempt Income” in your ITR (Income Tax Return). This maintains transparency and any kind of inquiry can be avoided in the future. While taking a claim, make sure to take all the documents and statements from the insurance company. These may be needed in the future. It is wise to keep all the information correct.