Section 10 (10d) of Income Tax Act, 1961 on Payouts of Life Insurance Policy

Life insurance is beneficial to provide a financially secure future to your family, but it also helps save money through income tax exemptions. Among the various benefits associated with a life insurance policy, tax deductions are undoubtedly one of the most sought after ones.

Taxpayers often want to know about the tax benefits that term insurance offers. They will often ask questions like term insurance comes under which section as per the Income Tax act. Of course, most people are aware that these benefits are available under section 80C. Under section 80C of the Income Tax Act, 1961, the life insurance premiums you pay during any financial year are exempted from your taxable income up to a maximum of INR 1.5 lakh. However, it is not the only section that proves to be the most favorable one for taxpayers. This is so because certain tax benefits are also available under section 10 (10d) of the Income Tax Act, 1961.

Any income received from your life insurance policy is exempted from income tax under this section, and this deduction is available for all types of life insurance policy payouts. What makes it all the more interesting is that the deductions under section 10 (10d) do not have any upper limit and include bonuses and surrender values as well.

Read ahead to understand what this section covers. The GIS in income tax, how you can you use section 10 (10d) for maturity returns, and more.

What is section 10 (10d) of Income Tax Act, 1961?

Under Section 10 (10D) of the Income Tax Act, 1961, an individual can avail tax exemption on the sum assured and accrued bonus (if any) received through their life insurance policy claim (maturity or death benefit). This exemption is also applicable for the returns earned from a ULIP and available on all forms of life insurance policy claims.

Individuals (salaried and non-salaried), Hindu Undivided Families (HUFs), Associations, Trusts, Companies, Body of Persons, Foreign Companies, and others can claim these exemptions.

For more information of Section 10D, please check: What is Section 10 of the Income Tax Act?

Analysing the exemption provisions of section 10 (10D)

Tax rebate on life insurance policy

• One can avail the exemptions under Section 10D if the premiums paid in a single year during the policy term are not more than 20% of the sum assured for a policy purchased between 1st April 2003 and 31st March 2012.
• However, if the policy is purchased after 1st April 2012, the premium payment should not exceed 10% of the assured sum.
• In case the policyholder is severely disabled or suffering from diseases, the exemption is on a life insurance policy issued before 1st April 2013 does not exceed 15% of the assured sum.

- The disabilities like mental retardation, autism, etc., that fall under this category are listed under section 80U of the act.

- The diseases that are considered under this exemption are specified in section 80DDB of the act

TDS on a life insurance policy

Since October 2014, if the amount you receive from the life insurance policy is higher than ₹1,00,000 on policies that don’t come under the exemption under Section 10(10D), then TDS at 1% will be deducted by the insurance company before making the payment. TDS is deducted on the bonus payments as well. On the other hand, if the amount received is lower than ₹1,00,000, then no TDS is deducted. While this amount received is fully taxable, one can claim credit for TDS deducted through filing their Income Tax Return.

Tax liability of single premium insurance policies

The maturity amount gained through a single premium insurance policy is taxable and not exempted under Section 10(10D) of the Income Tax Act. However, the single premium policy’s maturity benefit amount will be tax-free only if the minimum sum assured is ten times the single premium amount paid for the policy’s tenure.

Requirements under Section 10 (10d) for maturity returns

The maturity payout should fulfil the following criteria to enjoy tax savings under section 10(10D).

1. Benefit must be death payout.

2. The benefit received is not for a policy issued under section 80DD (3) of the Income Tax Act, 1961.

3. The payout received should not be available under Keyman Insurance Policy.

4. It must not be an annuity or pension plan payout.

5. Benefit is not received under an employer-sponsored group insurance scheme (GIS in income tax).

6. The insurance premium paid during any year must not exceed 20% of the sum assured for policies purchased between 1st April, 2003 and 30th April, 2012.

7. If the policy is purchased after 30th April 2012, the premium amount should not be more than 10% of the sum assured.

8. The insurance premium payable during any year should not exceed 15% of the sum assured for the policy. The same must be purchased on or after 1st April 2013, and the insurance must be for the life of any person, who is:

a. An individual with a disability or severe disability as per section 80U of the Income Tax Act, 1961.

b. Having any disease or ailment as specified in the rules under section 80DDB of the Income Tax Act, 1961.

c. If the maturity benefit of your policy is not exempt under section 10(10D), then the amount you receive is subject to tax deducted at source (TDS) as per the following rules:

i.If Permanent Account Number (PAN) is submitted, then 10% TDS on the total maturity amount.

ii.If PAN is not submitted, then 20% TDS applies to the total amount.

It comes as no surprise that most people have been purchasing insurance as a tax planning tool for decades now. But the actual purpose of these benefits is to offer an incentive to enable and encourage more individuals to procure insurance coverage.

Therefore, it is recommended that you clearly understand the different tax benefits available under various sections of the Income Tax Act, 1961. You must also be careful and not make your purchase solely based on the available tax benefits. What proves to be beneficial is to compare different term life insurance plans offered by various insurers, understand their features, benefits, inclusions, exclusions, and other terms and conditions and then make a prudent choice based on your needs and financial goals. Conducting extensive research online and using reliable sources to make the comparison is an easy means to achieve this. Another important aspect is to consider the insurance company’s reputation and reliability before finalising one. You must opt for a company that offers superior customer service and a higher claim settlement ratio to avoid complications in the future.

FAQs

1. Points to remember about Section 10(10D) of the Income Tax Act, 1961

Some noteworthy features include:

1. If the maturity benefit which you are eligible for under your insurance policy does not qualify for an exemption under the Section 10(10D), then the amount you receive from the policy will be subjected to TDS (tax deducted at source) under the following scenarios:

a. When an individual has not provided a PAN card, 20% TDS is applicable on maturity benefit.

b. When an individual has provided a PAN card, 10% TDS is applied on full maturity benefit.

2. Exceptions under Section 10(10D) of the Income Tax Act, 1961

Some of the exceptions under Section 10(10D) include:

• Amount obtained under Keyman Insurance Policy.
• Any amount obtained from an insurance policy issued on 1st April 2003 and before 31st March 2012. The premium amount for any year during the policy term exceeds 20 % of the actual sum assured.
• Any amount obtained under a policy issued after 1st April 2012 with the premium amount during the policy term exceeds 10 % of the actual sum assured.

3. Terms and conditions for availing tax exemption under Section 10(10D)

• This section provides income tax deductions on any sum obtained through an insurance plan’s maturity, death benefit, and bonus.
• Premium paid during any year for a policy cannot be more than 20% of the sum assured for life insurance bought between 1st April 2003 and 31st March 2012.
• Payout, which is not eligible for tax deduction under the keyman insurance policy, is eligible for deductions under this section.
• For policies bought after 1st April 2012, the premium payment cannot exceed 10% of the assured sum.