You will not have to pay any GST on the claim amount of the term policy. However, you will have to pay a GST of 18% and other relevant taxes on term insurance premium under Section 80C of the Income Tax Act.
Is Claim Amount Taxable in Term Insurance?
What Is Term Insurance Claim Amount?
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.
Is a Term Insurance Claim Amount Taxable?
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.
When Is Term Insurance Claim Amount Not Taxable?
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.
FAQs About Term Insurance Claim Amount:
Once you stop paying the premiums, your policy gets automatically terminated. Under such circumstances, you will not be eligible for a tax benefit if you raise a claim. Also, your nominee won't be able to receive a tax benefit on the claim amount in case of any unfortunate incident.
In a term insurance policy, a nominee is a person who receives the sum assured based on the policy terms and conditions. Now, you can choose your spouse, parents, children or even siblings as a nominee at the time of purchasing a term insurance policy. This way, you can provide them with financial security in case of your untimely demise.
Some of the health-related add-ons that are applicable under section 80D are Critical Illness, Hospital Care Rider, Surgical Care, and so on.
Other Important Term Insurance Guides
Other Important Articles Related to Term Insurance
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.