1. Life Insurance Maturity: Conditional Exemption
Life insurance maturity proceeds have increasingly complex tax treatment under ITA 2025, following Finance Act 2023 changes. The exemption depends on when the policy was issued and what premium was paid relative to the sum assured:
2. Policy Categories and Tax Treatment
| Policy Issued | Premium-to-Sum Assured Ratio | Tax on Maturity |
|---|---|---|
| Before 1 April 2003 | Any ratio | Fully exempt |
| 1 April 2003 – 31 March 2012 | Premium ≤ 20% of sum assured | Fully exempt |
| 1 April 2003 – 31 March 2012 | Premium > 20% of sum assured | Taxable as other sources |
| 1 April 2012 – 31 March 2023 | Premium ≤ 10% of sum assured | Fully exempt |
| 1 April 2012 – 31 March 2023 | Premium > 10% of sum assured | Taxable as other sources |
| After 1 April 2023 | Annual premium ≤ Rs 5 lakh (aggregate) | Fully exempt |
| After 1 April 2023 | Annual premium > Rs 5 lakh (aggregate) | Taxable as capital gains |
3. Post-April 2023 Policies: Important Change
For policies issued after 1 April 2023, the exemption depends on the aggregate annual premium across all non-ULIP life insurance policies. If total annual premium across all such policies exceeds Rs 5 lakh:
- The excess maturity proceeds (proportionate to the premium above Rs 5L) are taxable
- Tax rate: taxable as capital gains (not other sources) — held more than 12 months: LTCG; held less: STCG
- This effectively makes high-premium endowment and money-back policies tax-inefficient for HNIs
4. Death Benefit: Always Exempt
Death benefit paid to nominees under any life insurance policy is ALWAYS fully exempt under Schedule II of ITA 2025 — regardless of premium amount, policy type, or when the policy was issued. This absolute exemption applies to term insurance, endowment, ULIP, money-back, and all other life insurance policies. The death benefit exemption is unconditional and has no Rs 5 lakh cap.
5. ULIP (Unit Linked Insurance Plan)
ULIPs have their own specific provisions under ITA 2025:
- Policies issued before 1 February 2021: maturity proceeds fully exempt if premium-to-sum assured ratio is met (10% rule)
- Policies issued on or after 1 February 2021 with annual premium above Rs 2.5 lakh: maturity is taxable as capital gains (similar to equity mutual funds — LTCG 12.5% if held 12+ months)
- STT applies to ULIP redemption in certain cases
- This change significantly reduced ULIP attractiveness as a tax-saving instrument for high-premium payers
6. Health Insurance: Premium Deduction Under Section 126
Health insurance premiums are deductible under Section 126 (80D equivalent) of ITA 2025 — available in the old regime only. Deduction limits:
- Self, spouse, and dependent children: Rs 25,000 (Rs 50,000 if any insured person is a senior citizen)
- Parents premium: Rs 25,000 additional (Rs 50,000 if parent is senior citizen)
- Maximum: Rs 1,00,000 per year (senior taxpayer with senior citizen parents)
- Preventive health check-up: Rs 5,000 within the above limits (no bill required)
7. Keyman Insurance Policy
Keyman insurance is taken by a company on the life of a key employee (CEO, founder) to compensate the company for loss on that person death or critical illness. Tax treatment:
- Premium paid by company: deductible as business expense under Section 37
- Maturity/death benefit received by company: taxable as business income
- If keyman policy is transferred to the employee (as part of compensation): surrender value becomes taxable perquisite in employee hands
8. TDS on Insurance Proceeds
Insurance companies deduct TDS at 5% on maturity proceeds if:
- Policy does not qualify for full exemption (premium ratio exceeded)
- Maturity amount exceeds Rs 1,00,000
- PAN of policyholder is not furnished: TDS at 20%
- Death benefit: NO TDS (always exempt)
9. Why TaxClue
Insurance taxation — especially for post-April 2023 policies, ULIPs, and keyman policies — requires policy-by-policy analysis. TaxClue reviews your insurance portfolio for tax implications and files ITR correctly. Contact us under ITA 2025.