You won’t pay income or capital gains tax on a disability benefit you receive from a policy taken out in your own name. This is because your premiums are paid with after-tax money.
However, if you invest the money and earn returns on it, the returns may be taxable.
Premiums paid on income protection policies were tax deductible until March 1, 2015 and any income payments made to those who claimed on these policies before that date were taxable.
An amendment to the Income Tax Act removed the tax deduction and made the pay outs tax free in line with the benefits from all other life, disability and severe illness policies.
The exception to this is if you enjoy group life disability benefits through an approved scheme. If tax-deductible contributions to your retirement fund were used by the fund to pay for cover in an approved scheme, the benefits paid to you on disability may be taxable. Lump sums will be taxed in terms of the retirement fund lump sum benefits or severance benefits tax table. Read more: What tax will I pay when I retire?
