LifestyleIs The Term Insurance Payout Taxable?


Is The Term Insurance Payout Taxable?

Investors frequently concentrate on tax advantages. For the term insurance payout, let’s understand how the tax situation plays out for it.

Insurance payout taxes can reduce profits, affecting future income and lifestyle.

Let’s examine the taxability of insurance payouts in terms of products.

Term life insurance:

Premiums are paid for a pure life cover under a term life insurance policy. The recipient receives a payout equal to the sum insured upon demise. The Income Tax Act’s Section 10(10D) allows the beneficiary to receive the entire sum insured without paying any taxes. There are also no restrictions on the claim amount.

It is also easy to predict the premium rates using a term insurance calculator online to determine the affordable rates as per your requirements.

Coverage for critical illness:

Assume you have health insurance and file a claim for hospitalisation. Since it’s just a reimbursement for your medical bills and not a new source of income or a profit, the claim amount you get won’t be taxed.

In the end, almost all money transfers for insurance claims filed by the recipient are tax-free.

However, insurance policies that focus on investments have a different tax treatment. Sec. 10 (10D) has various exclusions, which explains why.

  • Case 1:

If you purchased your insurance after April 1, 2012, and your premium payment exceeds 10% of the amount promised

Suppose a person purchased a policy in 2016. They pay a 30,000-rupee annual premium for the policy, with a promised value of  2 lakh rupee. Since the yearly premium paid is more than 10% of the amount insured (Rs 20,000), the money received may have to be taxed at the marginal rate.

To identify your taxable income, the premium paid over the years must be subtracted from the maturity proceeds. Add any term insurance tax benefits you receive. For tax purposes, this income gets categorised as “income from other sources.”

In contrast, there are no taxes if the annual premium is less than 10% of the amount assured. The premium threshold is 15% of the amount that is guaranteed for people who are sick or have a disability.

  • Case 2:

If you purchased your insurance before April 1, 2012, and your premium payment exceeds 20% of the sum promised

Taxes shall be due on maturity proceeds in this situation as well. Therefore, remember that you must consider 20% rather than 10% of the sum assured if you have an old policy (purchased before April 2012).

The identification and financial planning can be carried out for the required benefits of term insurance by using the online term insurance calculator provided by your insurer.


Under Section 10, the ULIP NAV gains from investing in ULIPs are not subject to income tax (10D). Because of an IRDAI-rule that changed in October 2019 (from 10 times the annual premium to 7 times the annual premium), not all ULIPs would be eligible for the exemption.

Additionally, the premium for ULIP investments must be at least ten times the sum assured to qualify for Sec 80C benefits.

In other words, holders of ULIP policies must have a minimum sum assured of ten times the policy amount. This is necessary if they want to take advantage of Sections 80C and 10D, which give them exemptions and tax breaks, respectively.

Single premium:

The IRDAI has said that for single premium policies, the minimum sum assured had to be 125% of the single premium. It qualifies for the Section 80C advantages, but is ineligible for Section 10D because it exceeds the 10% level.

Retiree programmes:

The entire retirement corpus cannot be taken on the vesting date in a retirement plan.

An insurer may permit a lump sum withdrawal of up to one-third of the total corpus. The balance produces an annuity that provides a consistent cash flow. The lump sum payment is not taxed, but the income from a pension is taxed at the marginal rate.

TDS impact:

There are various term insurance tax benefits, one of which is section 194DA, that are enabled if taxes on the maturity amount are applicable. The insurance deducts TDS at a rate of 5% from the revenues. TDS is not applicable to incomes up to Rs 1 lakh.

To lessen the financial strain on policyholders in the fiscal year 2020–2021, the government has decreased the TDS rate from 5% to 3.75%.


Most term insurance plans are eligible for tax exemption under section 10, since they have a substantially smaller premium (than investment products) as a percentage of the sum assured (10D). Separating your insurance needs from your investment demands makes good financial sense. Also, remember that individuals and Hindu Unified Families (HUF) are given an option of opting for either the old or the new tax regime. So make the right decision of the regime, to enjoy the desired tax benefits.

Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.

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