Income Tax on Term Insurance Claim Amount & the Tax Rates in 2025

When dealing with the loss of a loved one, understanding the tax implications of a term insurance claim shouldn’t add to your stress. This comprehensive guide will help you understand exactly how income tax applies to term insurance claim amounts in simple, clear terms.

We will walk you through everything from basic tax rules to specific scenarios, helping you make informed decisions about your term insurance claims.

A term insurance claim amount refers to the sum of money paid by an insurance company to the nominee mentioned in the policy document upon the death of the insured. This ensures financial security for the policyholder’s family.

While term insurance primarily provides coverage in case of death, some policies, known as return-of-premium (ROP) policies, return the premium paid at the end of the term if the insured survives.

However, for a claim to be honoured, it must fall within the terms and conditions of the policy. Claims can be rejected if they fail to meet certain conditions. Therefore its essential for the policyholder or nominee to verify policy details before filing a claim.

Who Can Claim?

• The nominee after the insured person’s death.
• The policyholder, upon maturity, if it's a Return of Premium policy.

Sometimes, claim amounts may be taxable, and understanding the tax implications can result in potential savings. Let’s explore the relevant provisions of the Income Tax Act and how they affect term insurance payouts.

When the Claim Amount is Paid as Death Benefit

The most common scenario in which a term insurance claim is entirely tax-free is when it’s paid as a death benefit. If the policyholder passes away during the policy term, the insurance company disburses the sum assured to the beneficiary under Section 10(10D) of the Income Tax Act. In such cases, the entire claim amount is exempt from tax for the beneficiary. 

The following are key points that make term insurance death claims tax-free:

• There is no cap on the tax-free amount for death benefits. The entire amount remains exempt if the sum assured is INR 10 lakh or INR 1 crore.
• If the term insurance includes riders like accidental death benefits, any claim amount received under such riders is also tax-free under Section 10(10D).

This section applies only when the claim is due to the policyholder’s death. It doesn’t cover any maturity benefits or survival benefits, although traditional term insurance policies typically lack such benefits.

When the Claim Amount is Paid Under Rider Benefits

Term insurance often includes optional riders like accidental death benefits or critical illness coverage. In most cases, claims made under these riders are tax-exempt under Section 10(10D), provided they qualify as death benefits. Here's how the taxation rules work for these riders:

• If a claim is made under a rider that provides a death benefit (like accidental death), it is generally tax-exempt. This means you won’t have to pay taxes on the money you receive.
• Some riders, like critical illness or disability benefits, may not be linked to the policyholder's death. Even though they are paid out while the person is alive, they can still be tax-exempt if they are designed properly according to the policy.

It’s essential to read the terms of your policy carefully to understand how the riders work and how they relate to tax rules, particularly Section 10(10D).

Tax Implications for Non-Resident Beneficiaries

Tax treatment can vary if the beneficiary of a term insurance claim is an NRI or a foreign national. While Section 10(10D) provides tax exemption for death benefits in India, for NRIs and foreign nationals, there may be additional reporting requirements depending on the tax laws of their country of residence. 

For example, NRIs residing in the United States may have to disclose the amount received from a life insurance policy to the Internal Revenue Service (IRS) as part of their annual tax return.

Double Taxation Avoidance Agreements (DTAAs) between India and other countries may prevent the taxation of the claim amount in both countries. These agreements are designed to prevent residents from being taxed twice on the same income in both India and their country of residence. Still, the beneficiary should consult a tax professional for specific guidance on international tax compliance.

Terms and Conditions:

To ensure that the death benefit remains tax-free, certain conditions must be met:

• The policy must be a genuine life insurance policy, not a mere investment scheme.
• The annual premium paid towards the policy should not exceed 10% of the sum assured.
• The policy term should be for a minimum of 12 years.

Policies Where Premium Paid Exceeds Permitted Limit

If the premium paid on a term insurance policy exceeds 10% or 20% of the sum assured, the death benefit may not qualify for exemption under Section 10(10D). In such cases, the payout will be added to the nominee’s income and taxed as per their income slab rate.

Example: A term policy with a sum assured of ₹10 lakh issued in 2018, where the annual premium is ₹1.5 lakh (15% of the sum assured), may result in a taxable payout. Since 15% exceeds the 10% threshold, the claim amount may be subject to tax.

Survival Benefits and Term Insurance

While most term insurance policies do not have survival or maturity benefits, some modern policies include a “Return of Premium” (ROP) feature. In these cases, if the policyholder survives the policy term, they receive a portion of the premiums paid.

As per current tax laws, the maturity proceeds may be taxable if the annual premium exceeds 10% of the sum assured. However, the proceeds are generally tax-free if the premium is within this limit.

Example: Suppose you purchase a sum assured of ₹10 lakh with an ROP term insurance policy with a term of 20 years and pay an annual premium of ₹10,000. If you survive the policy term, the insurer will return the total premiums paid, which would be ₹2,00,000 (₹10,000 x 20 years). However, this amount is more than 10% which will be subject to tax based on the prevailing tax rules.

Other Situations That Could Trigger Taxation

Although rare, there are instances where a claim amount might become taxable. Here are a few examples:

• If the term insurance policy is used as collateral for a loan, and the insurance payout is directed to the lender, there might be tax implications depending on how the claim is structured.
• When a company takes out a term policy on a key employee (often called “keyman insurance”), the claim amount received by the company could be subject to taxation. Corporate-owned policies may follow different tax rules than individual policies.

1. Type of Beneficiary

2. Policy Ownership

3. Premium Payment Method

4. Estate Inclusion

5. Interest Component

6. Exclusions and Riders

Choose the Right Policy

Consider Splitting High Premium Policies

Regular Review and Update

Allocate Damages Carefully

Use Tax-Advantaged Accounts

Consider a Structured Settlement

Seek Professional Advice