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Will Your Life Insurance Maturity Be Taxed? Here’s What You Need to Know

  • Writer: Rajeev Roshan R
    Rajeev Roshan R
  • Mar 20
  • 3 min read

For years, life insurance policies have been a trusted financial tool, offering security and tax-free maturity benefits. However, Budget 2023 introduced significant changes. Now, if your total annual premium across all traditional life insurance policies exceeds ₹5 lakh, your maturity proceeds may be taxable. Let's explore what this means for you.


What’s Changing?

Previously, all life insurance maturity proceeds were 100% tax-free under Section 10(10D) of the Income Tax Act, 1961, provided the annual premium did not exceed 10% of the sum assured.

As of April 1, 2023, new rules apply:

  • Total Annual Premium Limit: If the combined annual premium for all non-ULIP life insurance policies exceeds ₹5 lakh, the maturity proceeds become taxable.

  • Effective Date: This rule applies only to policies issued on or after April 1, 2023. Policies issued before this date remain tax-exempt.

  • Death Benefits: Regardless of the premium amount, death benefits continue to be fully tax-free.


Why Has This Rule Been Introduced?

The government aims to prevent tax-free investment loopholes. Previously, high-net-worth individuals could invest large sums in life insurance policies to enjoy tax-free maturity benefits. This rule aligns non-ULIP life insurance policies with the taxation rules of ULIPs, which were already taxable if the annual premium exceeded ₹2.5 lakh.


Who Will Be Affected?

This new tax rule impacts:

  • Policyholders with high-value life insurance plans, including endowment and money-back policies.

  • Individuals holding multiple life insurance policies with combined annual premiums exceeding ₹5 lakh.


Important: Premiums Are Aggregated at PAN Level

The ₹5 lakh limit applies across all policies held by an individual, aggregated at the Permanent Account Number (PAN) level. Even if you split premiums across multiple policies, the total annual premium under your PAN will be considered. If this combined premium exceeds ₹5 lakh, the maturity proceeds will be taxable.


How Will Your Maturity Proceeds Be Taxed?

If your total annual premium across non-ULIP policies exceeds ₹5 lakh, the maturity amount will be taxed under “Income from Other Sources”.

  • Premium Paid: The total premium paid over the years is not taxed; you receive this amount back.

  • Returns: The returns generated (bonuses, interest, or profit over the premium paid) will be added to your total income and taxed at your applicable income tax slab rate.

Policy Details

Example Value

Annual Premium

₹6 lakh

Policy Term

10 years

Total Premium Paid

₹60 lakh (₹6 lakh × 10 years)

Maturity Amount

₹1 crore

Taxable Portion

₹40 lakh (₹1 crore - ₹60 lakh)

Tax Liability

₹40 lakh is added to total income and taxed as per your slab

If you fall in the 30% tax bracket, you will pay ₹12 lakh (30% of ₹40 lakh) as tax.


What Are the Exceptions?

While most high-premium policies are now taxable, some life insurance policies and scenarios remain fully tax-free:

Type of Policy/Payout

Tax Status

Policies Issued Before April 1, 2023

Fully tax-free

Death Benefits (Payout to nominee)

100% tax-exempt

Term Insurance (No maturity benefit)

No impact

ULIPs (Unit-Linked Insurance Plans)

Already taxable if annual premium exceeds ₹2.5 lakh


The Bottom Line

The ₹5 lakh premium rule represents a significant shift in life insurance taxation. It ensures that life insurance serves primarily as protection rather than a tax-free investment vehicle.

If you purchased policies before April 1, 2023, your maturity proceeds remain tax-free. However, if you're considering new high-premium policies, it's crucial to understand the tax implications before proceeding.


For personalized guidance and to explore comprehensive financial solutions, consider reaching out to VR Financial Services. We specialize in wealth management, investment strategies, and insurance solutions tailored to individual needs. Visit their website at www.vrfinserv.com or contact them via email at contact@vrfinserv.com for more information.



Disclaimer: This article is for informational purposes only and should not be considered financial, tax, or legal advice. Tax laws and regulations are subject to change, and their application may vary based on individual circumstances. Before making any financial or insurance-related decisions, consult with a certified tax professional, financial advisor, or legal expert to understand how these rules apply to your specific situation. Neither the author nor this platform is responsible for any financial or legal consequences arising from the use of this information.

 
 
 

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