Do Beneficiaries Need to Pay Taxes on Life Insurance in India?
Tax benefits on term life insurance are one of the most important reasons to invest in it. The premium paid for the term policy will qualify for the tax deduction under Section 80C of the Income Tax Act, 1961. In addition, beneficiaries also will benefit from tax exemption under Section 10(10D) on the payout. However, it is subject to certain terms and conditions. Therefore, it is important to understand the tax saving options in a term policy and invest in it to ensure maximum financial protection while also saving on tax. Here is a detail about it for your reference.
Before we get started, let us understand who is a beneficiary in the term policy.
Who Is A Beneficiary In The Term Policy?
A beneficiary in the term policy is a family member you will nominate for receiving the payout benefit in case of your unexpected death.
Term life insurance is a traditional life insurance plan that provides a lump sum death benefit to your nominee in case of your unexpected demise during the policy term.
You can customise the term policy by choosing flexible features. For example, when you purchase the Tata AIA term plan, you can opt to help your beneficiary receive the payout as a regular income. It will be advantageous if you feel your family members may be unable to utilise the lump sum wisely.
This payout and any bonuses or the return of premium will qualify for the tax exemption under Section 10(10D) of the Income Tax Act, 1961. However, it is based on certain conditions.
Tax Advantages For The Beneficiary
The tax on insurance payout will qualify for the exemption based on the following criteria:
- If the term life insurance is purchased on or before 31st March 2012, the annual premium should not be exceeding 20% of the sum assured.
- If the term policy is purchased on or after 1st April 2012, the annual premium should not be exceeding 10% of the sum assured.
- If you have not received any amount under the Section 80DD(3) or Section 80DDA(3) of the Income Tax Act, 1961, the payout shall apply for the tax exemption.
- Also, the term policy should not be based on a Keyman Insurance Policy. It is a life insurance plan purchased by an employer or the company for a key person employed for the business.
Based on these terms and conditions, the tax saver plan will qualify for the exemption when your beneficiary receives the payout during your unexpected demise. Therefore, the lump sum death benefit with the tax advantage is a financial legacy you can leave for your family. Prefer purchasing the online term plan because it becomes easy to read through the policy features, compare the term policy solutions and buy the ideal product.
Purchasing term policy will provide a lump sum death benefit to your beneficiary in case of your unexpected demise. The payout can be a lump sum or a regular income. The payout will qualify for the tax exemption under Section 10(10D) of the Income Tax Act, 1961, based on certain tax provisions. Therefore, you need to understand these life insurance taxable provisions, compare the options, and decide on the most affordable term policy. And, to ensure your beneficiaries avail of the tax advantage, you must stay invested and pay the premium regularly through the policy tenure!