When a person passes away, life insurance becomes one of the primary sources of financial support for their family. However, many people remain confused about whether the amount received from the insurance claim is taxable. Some believe the full amount is tax-free, while others worry they might need to pay tax on it.
Let us break down the rules and help you understand in which situations insurance claims are tax-free and when they are not.
Insurance Claim After Death Is Usually Tax-Free Under Section 10(10D)
As per Indian income tax laws, any amount received by the nominee after the insured person’s death is usually fully exempt from tax under Section 10(10D) of the Income Tax Act.
For example, if your family receives ₹25 lakh, ₹50 lakh, or even ₹1 crore from a life insurance policy after the policyholder’s death, you don’t have to pay any income tax. This is true as long as the policy meets certain basic conditions explained below.
When Life Insurance Claim Is Not Tax-Free
There are certain cases where the income tax department does not allow exemption. Let us see when the payout becomes taxable.
1. Keyman Insurance Policy
If an organisation or business buys a life insurance policy in the name of an important employee or partner, and the company receives the payout after the person’s death, this is not tax-free.
This is because the benefit goes to the company, not the individual’s family. These are called Keyman Insurance Policies, and Section 10(10D) exemption does not apply here.
2. Disability-Linked Policies (Section 80DD/80DDA)
Suppose a policy is bought under Section 80DD(3) or 80DDA(3), and payment is made on the death of a disabled dependent. That amount is not considered a death benefit, and tax exemption under Section 10(10D) is not available.
These sections are meant for people with disabilities, and the policies here work differently.
3. High-Premium Policies Issued Between April 2003 to March 2012
For life insurance policies bought between 1 April 2003 and 31 March 2012, the tax exemption applies only if the annual premium was less than 20% of the sum assured.
For example, if your policy had a sum assured of ₹5 lakh and you paid more than ₹1 lakh in premium per year, the maturity proceeds may not be tax-free. Many high-income individuals used such policies to convert investments into tax-free money, so the government added this condition.
4. High Premium Policies After 2012 With Maturity or Surrender Value
The rules became stricter for life insurance policies purchased after 1 April 2012. Tax will be applicable if the premium is more than 10% of the sum assured and the amount received is not a death benefit (but a surrender or maturity value).
But remember, death benefits under these policies are still tax-free, even if the premium is high.
Is TDS (Tax Deducted at Source) Applicable on Life Insurance Claims?
In most genuine death claim cases, no TDS is deducted by the insurance company.
However, if the policy does not qualify for exemption under Section 10(10D), or if PAN is not provided, the insurer may deduct 5% TDS on the income portion of the payout.
Ensure that PAN is submitted and the policy qualifies under tax-free conditions to avoid TDS deductions.
Term Insurance Policies Are Fully Tax-Free
Term plans are pure insurance plans with no maturity value. They provide a payout only if the policyholder dies during the policy term. These claims are 100% tax-free under Section 10(10D), as they are genuine death benefits.
So, if your nominee receives money from a term insurance plan, they will not need to pay any tax.
Who the Nominee Is Does Not Affect Tax Benefit
It doesn’t matter who the nominee is—wife, husband, child, parent, or any other person. As long as the claim is due to the insured’s death, the full amount is tax-free under Section 10(10D).
The nominee can be a male or female family member; there is no discrimination or limitation on the relationship.
Should You Mention Insurance Claim in Your ITR?
Even if the amount received is exempt, it is a good practice to declare it as “Exempt Income” while filing your Income Tax Return (ITR). This keeps your financial records clean and transparent.
It also helps avoid unnecessary scrutiny by the tax department in the future. You can also take a written statement from the insurance company about the tax status of the payout.
Documents You Should Keep When Claiming Life Insurance
When claiming a life insurance payout, always collect and keep the following documents:
- Death certificate of the insured
- Insurance policy documents
- Nominee’s PAN and Aadhaar
- Claim form from the insurance company
- TDS certificate (if any deduction is made)
- Tax exemption declaration under Section 10(10D)
Keeping these papers safe will help if any issue comes up later with the tax department or the insurer.
Final Tip for Policyholders
If buying a life insurance policy, always ask your insurer whether the payout will be tax-free under Section 10(10D). Avoid high-premium, low-cover policies that may lead to tax complications later.
Also, life insurance should not be treated only as an investment. Life insurance primarily aims to protect your family if something happens to you financially.
Sources: Income Tax Department, IRDAI, LIC
