It is a common misconception that the proceeds from a life insurance policy are completely tax-free, and that is not entirely true. The amount is subject to some conditions and exceptions. You need to be aware of the how the proceeds from the life insurance policy will be treated and know when it is taxable or when it is tax-free, especially if you are a policy-holder.
1. On the death of the insured individual, the proceeds of the life insurance policy is tax-free in the hands of the nominee.
2. For policies issued between 1 April 2003 and 31 March 2012, if the premium paid exceed 20 percent of the actual sum assured, the proceeds from the policy will be taxed at a marginal rate.
3. For insurance policies issued on or after 1 April 2012, if the premium paid exceed 10 percent of the actual sum assured, the proceeds from the policy will be taxed at a marginal rate.
4. For severe disability or disease as specified under Income Tax Act, the limit will be increased from 10 percent to 15 percent if the policy was issued after 1 April 2013. The disability has be specified under section 80U and the disease has to be specified in section 80DDB of the IT Act.
5. In case of Keyman insurance policies, the proceeds are taxable.