Section 10(10D) of Income Tax Act – Tax Exemption on Life Insurance Payouts

• Tax-Free Payouts: Life insurance maturity and death benefits are generally exempt under Section 10(10D).
   
• Premium Deduction: Under the previous tax system, premiums paid were deductible under Section 80C.
   
• Exemption Conditions: The sum assured, the policy issuance date, and ULIP-specific regulations all affect the limits.

The amount from a life insurance policy, including maturity and death benefits, is exempt under Section 10(10D). If premiums remain within set limits, this income is usually not taxed.

Example: 

Kartik pays ₹2,00,000 yearly for his insurance policy, which offers ₹25,00,000. Since his payments are under 10% of the coverage, he owes no tax on the ₹30,00,000 at maturity.

Table:

The table shows how Kartik's premium payments impact his taxes and the taxability of insurance payouts under various premium scenarios.
 

If you go over the premium limit on a life insurance policy, the whole payout could be taxed. 

This blog explains how Section 10(10D) of the Income Act works and the tax benefits of having a life insurance policy under that section. 

Tax Benefits on Life Insurance Policy under Section 10(10D)

A life insurance policy's main tax benefit is twofold. The final maturity or death benefit received is normally tax-exempt under Section 10(10D).

Example: 

Nitin buys a life insurance policy worth ₹50,00,000, paying ₹1,20,000 annually. He can deduct this premium from his taxable income under Section 80C, up to ₹1,50,000. When the policy pays out, the amount is tax-free under Section 10(10D), provided the premium is less than 10% of the coverage, which is ₹5,00,000 in this case.

Taxpayers can claim Section 80C deductions for life insurance premiums, but a key restriction exists.
 

• Section 80C deduction for life insurance premiums is available only under the old tax regime.
   
• The deduction is not permitted under the new tax regime.
   
• This benefit applies to policies from any IRDAI-recognised insurer, not just LIC.

This valuable deduction is exclusively available under the old tax regime only.

Table:

This table shows the two tax benefits of life insurance policies.
 

The benefits you receive depend on the premium amount you choose and the tax regime you select.

Now, you know about the tax benefits in life insurance under Section 10 (10D). The next topic is 

Conditions for Exemption Under Section 10(10D).

(Bonus Tips: Be cautious if your employer has a Keyman Insurance Policy on your life. Even if premiums are within limits, the maturity benefit is taxable for the company. If the company transfers this amount to you, it’s treated as a perquisite and taxed as salary income, which can lead to unexpected tax liabilities.)

Conditions for Exemption Under Section 10(10D)

A life insurance payout's tax exemption is contingent upon specific requirements and is not guaranteed. With varying limits according to the policy's issuance date, these regulations mainly regulate the relationship between the premium paid and the sum assured.

Example: 

Mukesh has two policies. His first policy was issued in 2010 with a sum assured of ₹10,00,000. His second policy was issued in 2023 with a sum assured of ₹25,00,000.

• For his 2010 policy, the annual premium must not have exceeded 20% of the sum assured (₹2,00,000) for the maturity benefit to be tax-free.
• For his 2023 policy, the annual premium must not exceed 10% of the sum assured (₹2,50,000) to keep the maturity benefit exempt.

The key conditions for exemption are:
 

• Premium to Sum Assured Ratio:
   
  • For policies issued after April 1, 2012: The annual premium must not exceed 10% of the actual capital sum assured.
     
  • For policies issued between April 1, 2003, and March 31, 2012: The annual premium must not exceed 20% of the actual capital sum assured.

• Exemption for ULIPs (Unit Linked Insurance Plans):
   
  • For ULIPs issued after February 1, 2021: The exemption is available only if the aggregate premium paid in any previous year does not exceed ₹2,50,000.
     
  • This limit of ₹2,50,000 was increased to ₹5,00,000 for ULIPs issued on or after February 1, 2023.

• Universal Exemption for Death Benefit:
   
  • A critical exception to all the above conditions is that any sum received upon the death of the insured is always entirely tax-free, irrespective of the premium paid.

These pointers help you to understand the conditions of exemption.

Now, you understand the exemption under section 10 (10D). Let's wrap up with the conclusion of this blog.

(Bonus Tips: Many policies permit partial withdrawals, but only the premium amount is tax-free. The remaining profit is taxable in the year of withdrawal, so it's essential to calculate and declare it accurately to avoid potential notices for under-reporting income.)

TDS Rates Under Section 10(10D)

Section 10(10D) exempts life insurance payouts from Tax Deducted at Source (TDS), making maturity or death benefits tax-free. However, if the premium exceeds the prescribed limits, the payout becomes taxable, and the insurance company must deduct TDS before payment.

Example:

Ramesh received a maturity benefit of ₹15,00,000, but since his annual premiums exceeded 10% of the sum assured, the payout became taxable. The insurer deducted TDS under Section 194DA at 5% on the taxable portion before releasing the amount.

Table:

The table below explains how TDS applies to Ramesh’s taxable maturity benefit:
 

TDS ensures advance tax collection on taxable insurance payouts, reducing Ramesh’s final tax liability while ensuring compliance.

Now that we understand how TDS applies to taxable insurance payouts, let’s explore the exemptions under Section 10(10D) in detail.

Exemptions under the Income Tax Act's Section 10(10D)

Although life insurance payouts are generally exempt from taxes under Section 10(10D), certain restrictions and conditions apply to determine whether this exemption is applicable. Taxpayers can accurately claim tax-free status for insurance proceeds if they are aware of these exemptions.

Table Concluding the Income Tax Act's Section 10(10D)
 

The table that follows provides examples of different situations under Section 10(10D), demonstrating how policy type, premium caps, and payout terms affect whether or not death benefits and proceeds from life insurance policies, including ULIPs, are tax-exempt.

Section 10(10D) exemptions for life insurance are explained in the table. 

Premiums for regular and older policies are tax-free if within 10–20% of the sum assured. ULIPS have annual limits. Partial withdrawals exempt only the premium, but death benefits are always fully exempt. Policyholders can maximise tax benefits by following regulations.

If premium requirements are met, Section 10(10D) ensures life insurance payouts, including maturity and death benefits, are mainly tax-free. Death benefits are always exempt, but older policy rules and ULIP limits apply.The next is the conclusion of the blog.

Conclusion

Understanding Sections 10(10D) and 80C clarifies the tax advantages of life insurance, which can often be confusing. To receive your maturity benefits tax-free, make sure your premiums stay within the limits of your coverage. 

Select a policy that aligns with your tax requirements and financial goals. The best part is the peace of mind that a life insurance policy offers to you and your loved ones.

FAQs

Where should I show this exempt income in my ITR?

Although the income is exempt, it is considered a part of your total income. You must declare the amount received under the "Exempt Income" schedule of your Income Tax Return (ITR) form for that financial year.

Are ULIPs (Unit Linked Insurance Plans) also tax-free?

Yes, but with an additional condition. For ULIPs issued after February 1, 2021, the exemption under Section 10(10D) is available only if the total annual premium for all your ULIPs does not exceed ₹2,50,000. This limit was raised to ₹5,00,000 for ULIPs issued on or after February 1, 2023.

Is the death benefit from a life insurance policy taxable?

No. The most crucial exception is that any sum received upon the death of the person insured is always entirely tax-free, regardless of the premium amount or when the policy was issued.

Can I still claim a deduction for my life insurance premium under the new tax regime?

No. The deduction for life insurance premiums under Section 80C is only available if you opt for the old tax regime. This deduction is not permitted under the new tax regime.

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