Is Claim Amount Taxable in Term Insurance?

Term insurance claim amount is the money that an insurance company disburses to a nominee who is mentioned in the policy document. Besides this, policyholders can also receive the claim amount on maturity of the policy. However, it is essential that this claim falls within the terms and conditions of their policy. Otherwise, an insurer can reject the same. So before raising a claim for the payout of your policy, you must check the validity and policy terms to avoid rejection.

The following people are eligible to raise a claim for a term insurance policy:

• A policyholder on maturity of a policy.
• A nominee upon the death of the insured person.

At times you might have to pay a tax on these insurance policy payouts. Alternatively, you can also get tax benefits on the claim amount. So, you must be aware of some relevant Sections of the Income Tax Act to save more on taxes.

Yes, term insurance claims are taxable under certain sections of the Income Tax Act. However, you can also enjoy sumptuous tax benefits on the insurance policy payouts under several sections.

The different Income Tax Act sections related to a tax on term insurance claim amount are as follows:

1. Section 10D

According to this, if a nominee claims the sum assured on death of the policyholder, then they will not have to pay any tax on the same. However, there are some terms and conditions that are associated with this benefit.

These conditions are as follows:

The sum assured must be at least 10 times the premium, and the policyholder must have purchased it after 1st April 2012.

If an individual purchases the policy after 1st April 2013 for a disabled person, the premium is less than 15% of the sum insured.

If the claim amount is more than Rs. 1 Lakh, and the insurance company has your PAN, you will have to pay 1% TDS.    

Hence, you must keep these pointers in mind when claiming tax benefits under this section.

2. Section 80C

This is one of the most popular sections that taxpayers often use to their benefit. They include investment instruments such as EPF, PPF, ULIP, ELSS, and payments like children’s tuition fees, repayment of home loans, life insurance premiums, and so on. The maximum deduction available under this section is Rs. 1.5 Lakhs. 

The terms and conditions associated with deductions under this section are as follows:

• The yearly premium of the insurance policy must be within 10% of the sum assured.
• If a policyholder voluntarily terminates a policy within 2 years of its purchase, then he or she won’t be eligible for this benefit. 
• If you have purchased the current policy prior to 31st March 2012, you can claim this benefit only when the premium is less than 20% of the sum assured.

Once you fulfil any one of the criteria, you can claim tax benefits from this section of the Income Tax Act.

3. Section 80D

This section primarily offers tax benefits on health insurance policy premiums. However, if you have a health-related add-on with your term insurance policy, then you can claim benefits under this section as well. 

The conditions associated with tax benefits under this section are as follows:

The claim amount must not exceed Rs. 25,000.

If the policy covers your parent's health conditions as well, then you can claim an additional deduction of up to Rs. 25,000.

If their age is beyond 60 years, you can claim a deduction of up to Rs. 50,000.

The term insurance claims are tax-free if a nominee claims it on the death of the insured person. This is clearly mentioned under Section 10D of the Income Tax Act. However, it is essential to fulfil at least one criterion associated with Section 10D to be eligible for tax-free claims.

This article explained how term insurance claim amount is taxable and how you can avail tax benefits. Make sure to follow the right steps to claim term insurance to avoid rejection.