Is LIC Maturity Amount Taxable or Not – Know LIC Maturity Amount Taxable under Which Head?

Updated on Oct 17, 2023

What is the Maturity Amount?

Maturity amount is the sum of money received by a life insurance policyholder at the end of a policy term in case he/she survives the plan. Let us find out if the LIC maturity amount is taxable or not, in this post.

Also Read: How to check lic maturity amount

New CBDT Circular on Calculating Tax-Exempted Maturity Amount of Life Insurance Policies 

The Central Board of Direct Taxes (CBDT) issued a circular on August 16, 2023. The circular states the new guidelines on calculating the tax-deducted life insurance maturity amount in a financial year if the premium paid by the insured goes beyond a particular margin.

As per the new guideline, policyholders will not enjoy fully exempted maturity amounts from life insurance policies that were purchased on or after 1st April 2023. If a policyholder is paying a premium that is beyond INR 5 lakhs in a financial year, the individual will have to pay tax on the maturity amount of the policy. The rule applies to all life insurance policies with the exception of ULIPs. As per the new rule, the policies issued till March 31, 2023, will continue to enjoy tax-free status for the maturity amount.

In the case of ULIPs, the maturity amounts are taxable for policies purchased on or after 1st February 2022 if the premium paid by the insured exceeds INR 2.5 lakhs in a financial year.

Below are the criteria that need to be met for the proceeds from the life insurance policy to be taxable:

1. a) The maturity amount received from a life insurance policy will be taxed if the premium paid by the insured in the preceding years surpasses INR 5 lakh.
2. b) The maturity amount received from multiple life insurance policies will be taxable if the collective premium paid in the preceding years surpasses INR 5 lakh.

What do you mean by LIC Maturity Amount?

Life Insurance Corporation (LIC) of India pays a policyholder a sum of money as maturity benefit at the end of the policy term if the insured outlives the policy tenure. This amount is generally equal to the sum assured of the insurance policy at the time of maturity together with bonuses.

The proceeds of life insurance policies, including death and maturity benefits, allow tax benefits.  However, there are some limitations in terms of liability to taxation that everyone should be well aware of.  In this post, we will discuss if the LIC maturity amount is taxable or not and other details.

Also Read: LIC surrender value calculator

What is the LIC Maturity Benefit?

Let’s understand LIC maturity taxability by means of an example. Suppose you bought a life insurance policy of INR 10 lakh as sum assured for 10 years tenure. Now, when your tenure ends and if you outlive the policy period, LIC is likely to pay you the complete sum assured. This amount is called the maturity benefit.

There are some plans which allow an enhanced sum assured in the form of additional bonus earned through various guaranteed additions as well as loyalty accumulations. This boosts the maturity amount of the LIC policy.  However, do you know if the LIC maturity amount is taxable?

Read More: LIC vs Other Private Insurance Companies in India – Know Differences

LIC Maturity Amount is Taxable or Not – What Tax Implications are levied on LIC Maturity Benefit?

The total sum assured received as maturity benefit for surviving a life insurance policy of LIC is tax-free including the bonus as per section 10(10D) of IT. However, there are some eligibility criteria or conditions that need to be fulfilled to enjoy the tax-free maturity. Here, the sum assured of the life insurance policy and the premium amount is required to be in a particular ratio.

Let’s take a look at the different conditions of taxability of life insurance maturity amount of LIC.

Also Read: How to Calculate LIC Installment Premium Amount Without Tax

Conditions Under Which LIC Maturity Amount is Taxable

Below are the conditions under which the maturity amount of LIC insurance policies are taxable –

1. If the sum assured of the policy is coming from a Keyman Insurance. In a keyman insurance policy, an employer gets the insurance of their employees done and also receives the claim benefit
2. If the nominee of the policy dies before the insured due to any already existing disability
3. If the life insurance policy is bought under the name of an individual who had a disability, then the maturity amount received from the LIC policy is taxable
4. If the policy is in the name of a person suffering from a particular disease that is mentioned under section 80DDB, the maturity amount received from the policy is taxable
5. If you pay 20% more insurance premium in a year as compared to the Sum Assured for a policy bought on or after April 1, 2003, your maturity amount is taxable
6. Also, if you pay 10% or more premium in a year as compared to the Sum Assured for a policy bought on or after 1st April 2012, your maturity benefit is taxable

For example, if you buy a life insurance policy from LIC of India with a coverage amount of INR 10 Lakh,  your annual premium should be less than INR 1 Lakh to enjoy tax-free returns.

So, the maturity benefit in the above mentioned cases is added to the annual income of the insured and tax is levied on the total amount as per the tax slab that is applicable. In addition, the entire maturity benefit is levied with a 1% TDS, which is deducted from the amount before paying it to the insured by the insurer.

Also Know: How to Surrender LIC Policy Online Before Maturity

Conditions Under Which the LIC Maturity Benefit Is Not Taxable

Apart from the conditions mentioned above, the maturity amount in the rest of the conditions come under the category of entirely tax-free.

1. If you pay a premium which is within 10% of the sum assured under a life insurance policy bought on or after April 1, 2012, you can enjoy full exemption of tax from the maturity amount.
2. Likewise, if the premium paid is within 15% of the sum assured for a life insurance policy bought for a disabled individual on or after April 1, 2003, the maturity benefit is tax-free
3. Also, if the premium paid is within 20% of the sum assured for policies purchased on or after April 1, 2003, the maturity amount is tax-free

Let us take a look at some of the top life insurance plans offered LIC of India below.

Top LIC Plans 2023

Now that you know about tax-free benefits on LIC policy maturity, below are some of the popular LIC life insurance plans to invest in:

Read More: Download LIC Premium Payment Receipt Online in Simple Steps

How is the tax-exempt portion of life insurance plans going to be calculated?

As per the CBDT guidelines, individuals can opt for life insurance policies offering higher maturity amounts for tax benefits.

Here is an example as per the CBDT circular to show how tax benefits for the maturity amount of life insurance policies are calculated if the premium in the preceding years of the policy term surpasses INR 5 lakh.

In the table above, you can see that the life insurance maturity amount for policy A will enjoy tax exemption status since it was issued before April 1, 2023. However, other policies purchased on or after April 1, 2023, need evaluation to compute the tax-exempt percentage.

The maturity amount received from policies B and C also enjoys tax-exemption status because the combined yearly premium does not surpass INR 5 lakh in a year. However, the maturity amount of policy C will be taxed since the premium paid annually surpasses INR 5 lakh.

Final Words

LIC of India offers many lucrative policies and deals to benefit the common people. People generally like to know – LIC maturity amount is taxable under which head/section. The maturity amount of LIC policy is completely tax-free under Section 10(10D) if the conditions mentioned in the blog above are maintained. Further, investing in a LIC tax saving plan early-on in life helps by lowering the tax deductions, while saving more.

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