Income Tax on LIC Maturity – Understanding Tax Benefits and Reporting in ITR

Introduction

When it comes to life insurance policies, one important aspect to consider is the maturity amount. The maturity amount is the sum of money received by a policyholder at the end of the policy term if they survive the plan. However, it's crucial to understand the tax implications of the LIC (Life Insurance Corporation) maturity amount. In this article, we will delve into the tax benefits and reporting requirements for LIC maturity in the Income Tax Return (ITR).

Taxability of LIC Maturity Amount

According to the provisions of section 10(10D) of the Income-tax Act, 1961, any sum received under a life insurance policy, including the bonus allocated on such policy, is taxable if the policy is issued on or after April 1, 2012, and the premium payable in any year during the policy term exceeds 10% of the sum assured. However, there are exceptions to this rule.

If the life insurance policy was issued after April 1, 2003, but on or before March 31, 2012, and the premium payable in any year is more than 20% of the actual sum assured, then the policy proceeds received would be taxable in the hands of the insured. It's important to note that the actual sum assured should exclude any bonus element and premiums to be returned to the policyholders.

Therefore, for policies issued on or after April 1, 2012, and if the premium payable in any year is more than 10% of the actual sum assured, the policy proceeds received would be taxable. Similarly, in the case of a life insurance policy for disabled individuals, if the premium payable in any year is more than 15% of the actual sum assured, the policy proceeds received would be taxable.

However, if any such amount is received by the nominee, it shall not be taxable, even if the premium paid in any previous year is more than the specified percentages.

TDS (Tax Deducted at Source) on LIC Proceeds

Under section 194DA of the Income-tax Act, any amount received by an insured Indian resident from a life insurer is subject to TDS at a rate of 5%, provided the amount is not exempt as discussed earlier. However, if the proceeds received exceed Rs. 1,00,000 (net of premium), TDS will be applicable.

It's important to note that if the net income offered in FY2022-23 is lower than the taxable amount reported by the deductor, the full TDS credit may be challenged by the tax authorities. In such cases, proper explanation based on facts and documentation will be required.

ITR Form for LIC Maturity

The type of ITR form to be filled depends on various factors such as the taxpayer's residential status, nature of income, and type of assets held during the year. Assuming you are a salaried person and required to fill ITR-2 for FY 2022-23, the LIC maturity income should be disclosed under Schedule EI in ITR form 2. If you are in business, the same needs to be reported in ITR-3 and ITR-4 under Schedule EI as 'exempt income'. In cases where the LIC maturity amount is taxable, it should be reported under Income from other Sources.

Conditions Under Which LIC Maturity Amount is Taxable

To understand the taxability of LIC maturity amount, let's discuss the conditions under which the maturity amount of LIC insurance policies is taxable:

1. Keyman Insurance: The maturity amount is taxable if the sum assured of the policy comes from a Keyman Insurance, where an employer obtains the insurance of their employees and also receives the claim benefit.
2. Nominee's Death Before the Insured: The maturity amount received from the LIC policy is taxable if the nominee of the policy passes away before the insured due to any pre-existing disability.
3. Purchased on behalf of Disabled Persons: If a life insurance policy is purchased in a person's name who has a disability, the maturity proceeds obtained from the LIC policy are taxable.
4. insurance Bought for Specific Diseases: The maturity amount received from the insurance is taxable if it is in the name of a person who has a specific disease that is listed under section 80DDB of the Income-tax Act.
5. Premium Paid Exceeds 20% of Sum Assured: If you purchase an insurance policy on or after April 1, 2003, and your premium payment exceeds 20% of the total insured, your maturity amount will be subject to taxation.
6. Premium Paid Exceeds 10% of Sum Assured: If you pay 10% or more in premiums over the amount insured in a year for a policy purchased on or after April 1, 2012, your maturity benefit will be taxed.

For instance, in order to receive tax-free returns, you must pay an annual premium of less than INR 1 lakh for a life insurance policy from LIC of India with a coverage amount of INR 10 lakh. The maturity benefit in the aforementioned situations is added to the insured's yearly income, and tax is then applied to the total amount according to the appropriate tax slab. And before the maturity amount is paid by the insurer to the insured, a 1% TDS is subtracted from it..

Conditions for LIC Maturity Benefit Not Being Taxable

With the exception of the circumstances listed above, the maturity amount in the following cases falls under the category of being completely tax-free.

1. Premium Paid Within 10% of the Sum Assured: If you pay a premium for a life insurance policy purchased on or after April 1, 2012, within 10% of the sum assured, you are eligible for a full tax exemption from the maturity amount.
2. Premium Paid Within 15% of the Sum Assured for Disabled Individuals: The maturity benefit of a life insurance policy purchased on or after April 1, 2003 for a disabled individual is tax-free if the premium paid is within 15% of the sum assured.
3. Premium Paid Within 20% of the Sum Assured: For policies bought on or after April 1, 2003, the maturity amount is tax-free if the premium paid is within 20% of the sum assured.

In these situations, neither tax nor TDS is applied to the maturity benefit and the maturity amount is not added to the insured's taxable income.

Conclusion

Understanding the tax implications of LIC maturity is essential for policyholders. The taxability of the maturity amount depends on various factors such as the date of policy issuance, premium payable, and the purpose for which the policy was bought. It's important to report the LIC maturity income accurately in the ITR, taking into consideration the applicable ITR form and the specific schedules for reporting exempt or taxable income.

To ensure compliance with tax regulations, it is recommended to consult a tax professional or financial advisor who can provide personalized guidance based on your specific circumstances. By staying informed and fulfilling your tax obligations, you can maximize the benefits of your LIC maturity while staying on the right side of the law