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

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What is Section 10(10D) of the Income Tax Act?

Section 10(10D) of the Income Tax Act of 1961, allows tax exemption on payouts from life insurance policies, such as maturity amounts and death benefits, if conditions are met. For example, if you buy a life insurance policy with a sum assured of ₹10 lakhs, your annual premium should not exceed ₹1 lakh (10%) to keep the maturity amount tax-free. For ULIPs purchased after February 1, 2021, the total annual premium must not exceed ₹2.5 lakhs to avail of the exemption.

What are the Tax Exemptions Under Section 10(10D)?

When it comes to saving tax while also securing your family’s future, life insurance plays a crucial role. The 10 10D section of the Income Tax Act, 1961, offers tax exemptions on life insurance payouts, making these policies even more attractive. Let’s break down the 10 10 D income tax benefits in detail.

Life Insurance Policies Covered

The 10 10D benefit applies to most life insurance policies, including:

• Traditional life insurance plans (endowment, whole life)
• Term insurance policies
• ULIPs (Unit Linked Insurance Plans)

As long as the policy isn’t a keyman insurance or issued under an employer-employee group, it usually qualifies under this section.

Maturity

One of the biggest advantages of the 10 10D section is that the maturity amount received under a qualifying life insurance policy is completely tax-free. For example, if your policy matures and you receive ₹15 lakhs (including bonuses), this entire amount could be exempt under Section 10(10D), provided the conditions are satisfied.

Conditions for Exemption

To claim the exemption, a few key conditions must be met:

• For policies issued on or after April 1, 2012, the annual premium should not exceed 10% of the sum assured.
• The limit is 20% of the sum assured for policies issued between April 1, 2003, and March 31, 2012.
• The exemption applies only to ULIPs purchased on or after February 1, 2021, if the total annual premiums across all ULIPs do not exceed ₹2.5 lakhs.

Failing to meet these criteria could make the maturity proceeds fully taxable under “Income from Other Sources.”

Death Benefit

Regardless of the premium-to-sum-assured ratio, any amount received by the nominee upon the policyholder’s death is completely tax-exempt under Section 10(10D). This ensures financial security for the family without tax liabilities during difficult times.

Exceptions

There are certain situations where the 10 10 D income tax exemption is not available:

• Policies where the premium exceeds the specified percentage of the sum assured.
• ULIPs with a premium over ₹2.5 lakh (post Feb 1, 2021).
• Keyman insurance policies (taken by employers on key employees).
• Employer-employee group policies.
• Policies where payouts are made under Section 80C or 80DDA (for disabled dependents).

Understanding these exceptions is essential to avoid surprises at the time of receiving the policy benefits.

Eligibility Criteria for Deduction under Section 10(10D)

To enjoy the tax benefits offered under section 10 10D of Income Tax Act, certain conditions need to be fulfilled. Here’s a look at the updated eligibility criteria under sec 10(10D):

• Individuals can claim exemptions under 10 10D of the Income Tax Act for payouts received from life insurance policies issued by both Indian and international insurers. This includes maturity amounts, death benefits, and any additional incentives received under the policy.
• There is no upper limit on the claim amount for eligible life insurance payouts, making this section extremely beneficial for high-value policies.
• However, Keyman Insurance Policies are not eligible for exemption under section 10D, any proceeds from such policies are fully taxable.
• A significant update came via Budget 2021, introducing a specific clause in the 10 10D section for ULIPs (Unit Linked Insurance Plans). If you own one or more ULIPs issued on or after February 1, 2021, you can only claim the section 10 10D benefit if the total premium for each qualifying ULIP is ₹2.5 lakh or less per annum. If the premium exceeds this limit, no tax exemption is allowed on the maturity proceeds of that ULIP.
• Another major change was introduced in the Finance Act, 2023, which affects non-linked life insurance policies. For policies issued on or after April 1, 2023, if the aggregate annual premium across all such policies exceeds ₹5 lakhs, the maturity amount will be taxable. In such cases, the exemption under sec 10 10D will apply only to policies where the annual premium remains within the ₹5 lakh cap for any financial year during the policy term.

By understanding these rules under section 10 10D of Income Tax Act, policyholders can better plan their insurance purchases and ensure their tax savings remain intact.

Calculating Taxable Amount Under Section 10(10D)

Suppose Mr. Kumar purchased a life insurance policy for ₹5 lakhs and has been paying an annual premium of ₹50,000. After five years, he decided to surrender the policy, and the surrender value was ₹3 lakhs. In this case, the surrender value of ₹3 lakhs will be exempt from tax under Section 10(10D) since the policy has been held for over two years.

First of all, the proceeds received from the transfer of the life insurance policy must be determined. Now, subtract the premium paid from the proceeds received to arrive at the taxable amount.

If the policy were transferred before the completion of two years, the entire amount would be taxable. However, if the policy was transferred after the completion of two years, the taxable amount will be calculated as follows:

• For policies taken on or after April 1, 2003, but before April 1, 2012, the taxable amount will be calculated as the lower of the following two amounts:
• 20% of the proceeds received from the transfer of the policy
• The total amount of premiums paid for the policy till the date of transfer.

For policies taken on or after April 1, 2012, the taxable amount will be calculated as the lower of the following two amounts:

• 10% of the proceeds received from the transfer of the policy
• The total amount of premiums paid for the policy till the date of transfer.

Deduction Limit Under Section 10(10D)

It’s important to regularly monitor your life insurance policy—not just to track its performance but also to ensure that you’re still meeting the eligibility criteria under Section 10(10D). This means reviewing your annual premium payments, especially if you hold multiple policies like ULIPs or high-value non-linked plans.

If your premium crosses the specified threshold (₹2.5 lakh for ULIPs issued after February 1, 2021, or ₹5 lakh for non-linked policies issued on or after April 1, 2023), you could lose the tax exemption benefit. So, if your financial situation changes or you acquire new policies, it may be wise to adjust your premiums accordingly. Staying proactive in this way helps you retain the tax advantages available under 10 10D section while ensuring your policy continues to serve your long-term goals.

Final Thoughts

Section 10( 10D) provides several advantages for policyholders. From receiving tax-free death benefits to strategically utilizing surrender value options, this section offers valuable tools for managing financial needs throughout your life. However, it is crucial to remember the eligibility criteria and potential tax implications of different scenarios. By carefully reviewing your policy terms and seeking professional guidance when needed, you can unlock the full potential of Section 10(10D) and leverage its benefits for a secure financial future.

FAQs on Section 10(10D) of Income Tax Act

Suggested Readings

1. Tax Planning and Tax Benefits of Life Insurance

2.How to Save Income Tax for FY 2023-24