Understanding Tax Exemptions for Life Insurance Policies under Section 10(10D)

Section 10(10D) of the Income Tax Act outlines provisions for exempting specific amounts received from life insurance policies from taxation. This includes maturity payments, surrender values, and death benefits, provided certain criteria are met regarding the premium-to-sum-assured ratio. This exemption is applicable to various policy types like traditional insurance, ULIPs, and endowment plans.

What is Section 10(10D)?

This provision within the Income Tax Act grants tax exemption for any sum paid out from a life insurance policy, such as maturity proceeds, surrender amounts, or benefits paid upon the policyholder's death. The exemption is contingent on adherence to particular conditions concerning the premium amount in relation to the sum assured. It applies across different life insurance products, including unit-linked insurance plans (ULIPs) and endowment policies.

Conditions for Exemption Under Section 10(10D)

To qualify for tax exemption under Section 10(10D), specific conditions must be satisfied.

Insurance Premium Limit

For policies initiated after April 1, 2012, the annual premium must not surpass 10% of the total sum assured. For policies issued between April 1, 2003, and March 31, 2012, the annual premium should not exceed 20% of the sum assured. This particular premium limit condition does not apply to sums received as death benefits.

Policy Type

This exemption covers ULIPs, endowment plans, money-back policies, and term insurance policies that offer maturity benefits. However, for ULIPs issued after February 1, 2021, the exemption under Section 10(10D) is available only if the premium paid in any prior year does not exceed INR 2.5 lakhs. For ULIPs issued after February 1, 2023, the premium paid in any preceding year must not exceed INR 5 lakhs.

Death Benefits

Any amount received as a death benefit by the nominees is always exempt from tax, regardless of the premium amounts paid during the policy's tenure.

When Life Insurance Proceeds Become Taxable

Life insurance proceeds become subject to taxation in the following scenarios.

• If a policy was issued between April 1, 2003, and March 31, 2012, and the annual premium exceeded 20% of the sum assured, the maturity proceeds will be taxable for the insured.
• For policies issued after April 1, 2012, if the annual premium surpasses 10% of the sum assured, the maturity proceeds become taxable.
• In the case of policies issued after April 1, 2013, on the life of an individual with a disability or specific disease (as defined under Sections 80U and 80DDB), if the premium exceeds 15% of the sum assured, the maturity proceeds are taxable.

It is important to note that proceeds received by nominees upon the death of the insured remain tax-free, even if the annual premiums exceeded the specified percentages of the sum assured.

Additional Tax Benefits on Life Insurance Policies

Beyond the exemption provided by Section 10(10D), the Income Tax Act also allows for deductions on life insurance premiums under Section 80C. Taxpayers can claim a deduction of up to INR 1.5 lakhs for premiums paid. This deduction is only applicable under the old tax regime and is not permitted under the new tax regime. Premiums paid for policies from any insurer recognized by the IRDAI are eligible for this Section 80C deduction, not just policies from LIC.

TDS on Life Insurance Policy

If the amount disbursed from a life insurance policy exceeds INR 1 lakh, and the policy proceeds are not exempt under Section 10(10D), a Tax Deducted at Source (TDS) of 2% will be applied under Section 194DA by the insurer. This TDS also applies to bonus payments. If the received amount is less than INR 1 lakh, no TDS is deducted, but the entire sum is still taxable. Taxpayers can claim credit for any TDS deducted when filing their Income Tax Return.

Example of Life Insurance Taxability

Consider Mr. A, who purchased a life insurance policy from an approved insurer on July 31, 2015. The policy had an annual premium of INR 40,000 and a sum assured of INR 5 lakhs. Since the policy was issued after April 1, 2012, the premium should not exceed 10% of the sum assured. In this instance, the premium percentage is 8% (calculated as (40,000 / 5,00,000) * 100). As the 8% premium is less than the 10% threshold, the maturity amount for Mr. A's policy is entirely exempt from tax under Section 10(10D), and no TDS is applicable under Section 194DA.