Section 10(10D): Tax Exemption on Life Insurance explained

Section 10(10D) of the Income Tax Act, 1961 provides a valuable tax exemption on money received from life insurance policies in India. Under this section, amounts such as maturity proceeds, death benefits, bonuses or surrender values from qualifying life insurance policies are fully exempt from income tax, helping policyholders and their beneficiaries save tax when these proceeds are received. The exemption applies to traditional life insurance plans, Unit Linked Insurance Plans (ULIPs) and other life insurance policies provided certain rules about premium limits and policy conditions are met.

What is Section 10(10D)?

Section 10(10D) is part of the list of incomes that do not form part of total income under the Income Tax Act. It specifically states that any sum received under a life insurance policy is exempt from income tax if it meets the prescribed conditions regarding premiums and policy type. The exemption applies whether the benefit is paid on maturity, surrender, or death of the policyholder.

Tax Benefits under Section 10(10D)

1. Tax-Free Maturity Proceeds

Amounts received when your life insurance policy matures, including bonuses accrued over the term, are exempt from tax under Section 10(10D) if the policy meets the eligibility conditions.

2. Tax-Free Death Benefits

Death benefits paid to the nominee or beneficiary are always tax-free, regardless of the premium paid or policy age, ensuring full payout without tax liability in case of the policyholder’s demise.

3. Bonus and Surrender Values

Any bonus amounts or surrender value received under the policy are also eligible for exemption under this section, if the policy satisfies the conditions.

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Conditions & Eligibility Criteria

To qualify for the tax exemption under Section 10(10D), the following conditions must be satisfied:

Premium Limits Relative to Sum Assured

The tax exemption generally depends on the premium-to-sum-assured ratio:

• Policies issued after 1 April 2012: Annual premium must not exceed 10% of the sum assured.
• Policies issued between 1 April 2003 and 31 March 2012: Annual premium must not exceed 20% of the sum assured.
• For ULIPs issued on or after 1 February 2021: Annual premium of all ULIPs combined must not exceed ₹2.5 lakh to retain exemption on maturity proceeds.
• For non-linked life policies issued on or after 1 April 2023: The aggregate annual premium across policies should not exceed ₹5 lakh for the policy to remain exempt at maturity.

Policy Type and Issuer

• The insurance policy must be issued by an insurer approved by the IRDAI.
• ULIPs, traditional endowment plans, term plans with maturity benefits, and other qualifying life insurance policies are covered.

Exclusions

• Keyman insurance policies (taken by employers on key employees) and some group insurance policies do not qualify for this exemption.
• If a policy does not meet premium-to-sum-assured rules, the maturity proceeds may become taxable as income from other sources.

How Eligibility works in Practice?

Example 1:
A policy purchased after 2012 has sum assured ₹20 lakh, and the annual premium is ₹1.8 lakh (9%). Because the premium is less than 10% of the sum assured, maturity proceeds are exempt under Section 10(10D).

Example 2:
If a policy’s annual premium exceeds the prescribed percentage (e.g., 15% when the limit is 10%), the maturity payout may become taxable unless death benefits are received.

Interaction with other Tax Provisions

• Section 80C: Premiums paid toward life insurance may qualify for a deduction up to ₹1.5 lakh under Section 80C, separate from Section 10(10D).
• TDS: If a payout is not exempt under Section 10(10D) and exceeds ₹1 lakh, the insurer may deduct TDS under Section 194DA on the income portion of the payout.

Why Section 10(10D) Matters?

Section 10(10D) is one of the most important tax-saving provisions for life insurance policyholders in India. It allows you to:

• Receive full payouts tax-free, improving the actual benefit from your insurance.
• Plan long-term financial goals without worrying about tax on maturity or death benefits.
• Combine this exemption with Section 80C deductions for effective tax-efficient planning.

Conclusion

Section 10(10D) of the Income Tax Act offers a significant tax benefit by making payouts from qualifying life insurance policies,  including maturity amounts, death benefits, surrender values and bonuses, exempt from income tax. To enjoy this benefit, you must ensure your policy meets the eligibility criteria, especially regarding premium limits relative to the sum assured and policy issuance dates. This exemption helps strengthen your financial planning by allowing you and your loved ones to receive full life insurance payouts without facing tax liabilities.