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August 5, 2020

Is money received from Medical or Life insurance Taxable?

by Rubina Dsouza in Income Tax

Is money received from Medical or Life insurance Taxable?

Introduction

Life insurance is a contract between a policyholder and an insurance company to provide the policy holder with coverage based upon timely payment of premiums.

Life insurance provides a death benefit to the named beneficiary/ dependent (usually a spouse) upon policyholder’s death. However, there are also different types of life insurance policies (apart from policies providing a lump sum amount on death of policyholder).

Basic types of life insurance plans:

  1. Whole life policy – A whole life insurance plan covers a policyholder over his life. The main feature of a whole life policy is that the validity of the policy is not defined so the individual enjoys the life cover throughout his life.
  2. Term insurance – Term plans provide life cover with no savings / profits component. They are the most affordable form of life insurance as premiums are cheaper compared to other life insurance plans.
  3. Endowment plans – Endowment plans differ from term plans in one important aspect i.e. maturity benefit. Unlike term plans which pay out the sum assured, along with profits, only in case of an eventuality over the policy term, endowment plans pay out the sum assured under both scenarios – death and survival.
  4. Unit linked insurance plans (ULIP) – ULIPs are a variant of the traditional endowment plan. They pay out the sum assured (or the investment portfolio if it’s higher) on death/maturity. Since ULIPs invest in stock markets they are well-suited for individuals with appetite for risk.
  5. Money back policy – This is a variant of the endowment plan. A money back policy gives periodic payments over the policy term. To that end, a portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured.

Various benefits are attached to the life insurance policy, and tax benefit is one such key benefit. The tax benefit is available in terms of income tax deduction and income tax exemption. Provisions of section 80C offer the income tax deduction, whereas, provisions of section 10(10D) provides the income tax exemption.

Exemption under section 10(10D) on Maturity amount received

  1. Exemption under section 10(10D) is available on any amount received under a life insurance policy. Such amount includes death benefits, maturity benefits and, accrued bonus.
  2. However, there are certain exceptional cases, wherein, the exemption is not available under section 10(10D).
  3. When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 1st April, 2012 and 20% of sum assured for policies issued before 1st April, 2012– any amount received on maturity of a life insurance policy or amount received as bonus is fully exempt from Income Tax under Section 10(10D).
  4. Also policies taken after 1 April 2013, on the life of a person with a disability or a disease specified under Sections 80U and 80DDB respectively, where the amount received on maturity is tax free provided the premium paid does not exceed 15% of the sum assured.
  5. Any money received from a life insurance policy, where the premium is more than 10%, 15% or 20% of the sum assured as the case may be, is fully taxable.

Deduction under Section 80C

  1. Premium paid towards life insurance policies to insure the policyholder’s own life or the life of his/her spouse or child qualifies for deduction under Section 80C, up to a maximum of Rs 1.5 lakh a year.
  2. An individual and a HUF, both, can claim this deduction under Section 80C.
  3. However, to claim deduction under section 80C the premium paid should not exceed 10% of the sum assured where the policy has been issued after 1st April 2012.
  4. For policies issued prior to 1st April 2012, in order to claim this deduction, the premium paid should not exceed 20% of the sum assured.
  5. Further, the premium should not exceed 15% of the sum assured on a policy issued after 1st April 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB, to claim the deduction under Section 80C.

TDS on life insurance policy

If the maturity amount from a life insurance policy exceeds Rs. 1 lakh in a single year, the maturity amount will be taxable as per usual. TDS is deducted on the maturity amount of a life insurance policy as per provisions under Section 194DA:

  1. If the policyholder’s PAN details are available and registered, TDS is deducted at a rate of 1% of the maturity amount payable to the policyholder.
  2. If the policyholder’s PAN details are not available and registered, TDS is deducted at a rate of 20% of the maturity amount.

Health insurance or medical insurance is also an importance insurance that a person should have. The cost of healthcare in India is sky-rocketing, especially during these pandemic times. Health Insurance is a way to ensure you and your family can get the best medical care without worrying about the cost. In a health insurance policy, the cost of medical treatment of the insured person(s) is borne by the insurance company.

In exchange for a regular premium paid, the insurance company pays for all the expenses related to an illness for which the insured person needs treatment. This includes hospitalization, daycare, post, and pre-hospitalization, etc. and with the cashless facility, the bill is directly settled between the company and the hospital.

Is money received from health insurance policy taxable?

There are no express provisions on taxability of proceeds received under a health insurance policy. However, there is a prevailing view that the claim settlements received are not to be treated as taxable as they are a mere reimbursement of medical expenses incurred. Money received through a claim under a medical policy is only a reimbursement of expenditure already incurred by the policyholder. As this does not amount to profit or income for the insured person, this money is not taxable.

Is deduction of medical insurance premium paid available under Income Tax?

  1. Every individual or HUF can claim a deduction under Section 80D for their medical insurance which is taken from their total income in any given year.
  2. This deduction is also applicable if the health policy covers the policyholder’s spouse, dependent children or parents.
  3. An individual can claim a deduction of up to Rs 25,000 for the insurance of self, spouse, and dependent children.
  4. An additional deduction for the insurance of parents is available to the extent of Rs 25,000 if they are less than 60 years of age, or Rs 50,000 if the parents are aged above 60.
  5. If both the taxpayer and the parent for whom the medical covers have been taken for are aged more than 60 years, the maximum deduction that can be availed under this section is to the extent of Rs 1,00,000.

The world we live in is full of uncertainties and risks. Individuals, families, businesses, properties and assets are exposed to different types and levels of risks. Insurance is a financial product that reduces or eliminates the cost of loss or effect of loss caused by different types of risks. Taking an insurance policy is thus extremely important to provided financial support and reduces uncertainties that individuals may face.

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