Are maturity proceeds of single premium policy fully taxable?


I understand that maturity proceeds under Single Premium life insurance policies are not exempt under Section 10(10D). Are the full maturity proceeds treated? Can the policyholder claim indexation benefits treating the gain as long-term capital gains?

In respect of life insurance policies issued after 1st April; 2012, the maturity proceeds received are exempt only and only if the premium payable in respect of such insurance policy does not exceed 10% of the sum assured during the premium paying term. So in case the premium in respect of a single premium policy does not exceed 10% of the sum assured, the maturity proceeds received shall be fully exempt. In case the premium paid was more than 10% of the sum assured the difference between the maturity value and premium paid only will be taxable and not the whole of such maturity proceeds. 

This is borne out by the provision of Section 194DA which requires deduction of tax at source @ 5% of the amount of income comprised in the payment made in respect of life insurance policies. Please note that in respect of a single premium policy, while arriving at 10% of the sum assured, you cannot apportion the premium of a single year over the tenure of the insurance policy.

I feel that an insurance policy can be treated as a capital asset and the same can logically be inferred by taxation provisions of Section 112A in respect of ULIP policies where the premium paid exceeds Rs. 2.50 lakh during a year. So you can avail the benefit of indexation on such premiums paid for those premiums paid beyond three years of maturity.

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Updated: 08 Aug 2023, 02:44 PM IST

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