How the Proceed received from the Insurance Company is taxed?

Life Insurance Proceeds
Section 10(10D) specifies that any sum received under a Life Insurance policy is exempt from tax. Hence maturity proceeds (including the sum allocated by way of bonus) received from an endowment plan, from a term plan with return of premium feature, from installments of a money back plan and from withdrawals of a ULIP are exempted from tax.

Section 10(10D) also applies for sums received not only as maturity benefit but also towards death benefits. In other words death benefit received by a nominee or beneficiary of a policy is tax-exempted in the hands of the
beneficiary.

However, above rule does not apply to following amounts –
1. Sum received under Section 80DD(3), or
2. Any sum received under a Keyman Insurance Policy, or
3. Any sum received other than as death benefit under an insurance policy which has been issued on or after April 1 2003 and if the premium paid in any of the years during the term of the policy is more than 20% of the sum assured.

Pension Plans Proceeds
Under pension plans, upto 1/3rd of the maturity amount can be commuted and withdrawn in cash. Commuted Pension is treated as tax-free. With the remaining 2/3rd amount an annuity has to be purchased amount. However, one should remember that annuity received from Pension plans are not exempted from Tax. Pension receipts from the same will be treated as income from other sources in the hands of the assessee or nominee and taxed accordingly.

Where the assessee or his nominee surrenders the Annuity plan before its maturity, then the surrender value shall be taxable in the hands of the assessee or his nominee in the year of receipt.