Taxation of critical illness insurance benefits in Personal Income Tax

The Directorate General of Taxes (DGT) has issued a relevant ruling regarding the tax nature of benefits received from critical illness insurance. This resolution determines the correct way to include these amounts in the personal income tax return.

What the DGT has ruled

The query focused on the correct taxation of the benefit received following the activation of a critical illness insurance policy. The body has ruled that this concept should not be classified as income from life or disability insurance.

Instead, the benefit is considered a capital gain, in accordance with the provisions of Article 33.1 of the Law on Personal Income Tax (Ley del IRPF). To determine the exact amount of said gain, the following procedure must be followed:

• Take the total amount of the benefit received.
• Subtract the premiums paid that correspond to the current year.
• The resulting amount is the capital gain that must be declared.

Furthermore, the DGT points out that this gain must be included in the taxpayer's general tax base and is not subject to withholding or payment on account.

What this means for you

If you are a beneficiary of this type of policy, the tax impact is direct. You should not expect the insurance company to perform an automatic withholding on the capital received, as the obligation to declare this income rests entirely on the taxpayer in their annual tax return.

By being included in the general tax base, the amount of the benefit will be taxed according to the progressive rates of the IRPF, which may influence the effective tax rate applied to your other income.

What you should do

It is necessary to verify the nature of your health and critical illness policies to ensure that the applied tax treatment is correct. Since the amount of the gain depends on the calculation of the premiums for the fiscal year, it is essential to have the technical documentation from the insurer that allows these amounts to be broken down accurately. Every personal situation is different, so it is recommended to assess your particular case to avoid errors in the integration of the tax base.