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Income Tax Calculator: How Life Insurance Policies are Taxed? Explained

Income tax is a crucial aspect of financial planning, and it's important to understand how life insurance policies are taxed. Read ahead to know all about it.

  • 4,900 Views | Updated on: Mar 20, 2024

Income tax is a government-mandated tax that is levied on the income and assets of individuals and businesses. It is a crucial aspect of financial planning, as it helps determine how much of your hard-earned money goes to the government.

When it comes to life insurance policies, the tax implications can be complex and confusing. In this article, we will explain how life insurance policies are taxed, including the life insurance tax benefits, the taxability of life insurance maturity amounts, and how to calculate income tax on insurance maturity amounts.

If the maturity amount received on a life insurance policy is taxable, it must be included in the policyholder’s taxable income for the year. The tax payable on the maturity amount is calculated based on the policyholder’s marginal tax rate.

To calculate the income tax on the insurance maturity amount, follow these steps

  • Determine the Taxable Portion of the Maturity Amount
  • The taxable portion of the maturity amount is calculated as the difference between the premium paid and the sum assured.

  • Calculate the Taxable Income
  • The taxable income is calculated by adding the taxable portion of the maturity amount to the policyholder’s other taxable income.

  • Determine the Marginal Tax Rate
  • The marginal tax rate is the tax rate applicable to the policyholder’s taxable income.

  • Calculate the Income Tax
  • The income tax is calculated by multiplying the taxable income by the marginal tax rate.

How to use an Income Tax Calculator

Step 1: Calculate your gross income

Make a note of annual gross salary that must include all your compensation, including House Rent Allowance (HRA), Leave Travel Allowance (LTA), and any additional benefits you may be eligible for, such as food coupons and mobile reimbursements.

Step 2: Remove deductions to arrive at your net taxable income

By investing, saving, or spending on particular things, you can use tax deductions to further lower your taxable income.

You may deduct up to ₹1.5 lakh for a variety of investments and expenses under Section 80C, the largest pool for the deduction. One of the most common ways to take advantage of this deduction is by investments in term insurance premiums, PPF, ELSS Mutual Funds, EPF, Sukanya Smriddhi Yojana, and EPF.

Step 3:Finding your net taxable income

Determine the total income on which you must pay tax based on your tax slab by deducting all allowable deductions from your gross taxable income.

Step 4: Determine our taxes

Taxes are now paid on a person’s net taxable income.

You pay no tax on the first ₹2.5 lakh of your taxable income.

You must pay 5%, or ₹12,500, on the following ₹2.5 lakhs.

You must pay 20% of the next 5 lakhs, or ₹100,000.

For the portion of your taxable income that is greater than ₹10 lakhs, you pay 30% of the total amount.

Step 5: Streamline your net tax

Refund under Section 87A: A tax refund is a type of tax incentive that the government offers to people with incomes that are below a certain threshold. If your total taxable income after deductions is less than ₹5 lakh, you are eligible to apply for a ₹12,500 rebate under Section 87A.

The health and education cess of 4% can now be added to your tax amount if your taxable income exceeds ₹5 lakh to determine the total amount you will pay.

Tax Benefits of Term Life Insurance Policies

  • Term life insurance policies are a type of life insurance that provides coverage for a specified term, usually ranging from 10 to 30 years. They are the most affordable and straightforward type of life insurance, making them a popular choice for many individuals.
  • One of the key tax benefits of term life insurance policies is that the premiums paid are tax-deductible. This means that you can claim a tax deduction on the amount paid for a term life insurance policy, subject to certain limits set by the government.
  • Additionally, the death benefit received by the beneficiary upon the policyholder’s death is tax-free. This means that the beneficiary does not have to pay any income tax on the death benefit received.

Life Insurance Premiums Deductible

One of the important aspects of life insurance is the premium, which is the amount paid regularly to the insurance company to keep the policy in force. The premium is a crucial factor in determining the cost of life insurance, and it is essential to understand the different types of premiums and their impact on your policy.

  • A deductible life insurance premium is a premium that is paid directly from your pre-tax income. This means that the premium is not taxed, and you can reduce your taxable income by the amount of the premium paid.
  • It is important to note that not all life insurance premiums are deductible, and there are certain criteria that must be met for a premium to be deductible.
  • Some of these criteria include the type of life insurance policy, the purpose of the policy, and the amount of coverage.

Conclusion

Understanding how life insurance policies are taxed is crucial for anyone looking to invest in this type of financial product. The income tax calculator is a valuable tool that can help you determine the tax implications of your life insurance policy and plan your financial future accordingly.

By having a clear understanding of the tax laws, you can make informed decisions about your life insurance policy and ensure that you are maximizing your savings while minimizing your tax liabilities. Whether you are a seasoned investor or just starting out, taking the time to understand the tax implications of your life insurance policy is a smart move that will benefit you in the long run.

Key takeaways

    Follow these steps to calculate the income tax on the insurance maturity amount

  • Determine the Taxable Portion of the Maturity Amount
  • Calculate the Taxable Income
  • Determine the Marginal Tax Rate
  • Calculate the Income Tax

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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