Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
- Guaranteed@ Income Benefit for upto 25 years
- Flexibility to choose income period
- Premium break for females on child birth or any listed specific illnesses
- Life cover for the premium payment period
- Enhance your life cover with rider offerings
ARN. No. KLI/23-24/E-BB/1201
Features
- Increasing Life Cover*
- Guaranteed^ Maturity Benefits
- Enhanced Protection Through Riders
- Tax Benefits
- Dual Benefits: Guaranteed^Maturity + Death benefits
Ref. No. KLI/22-23/E-BB/999
Section 10(10D) of the Income Tax Act, 1961 on Payouts of Life Insurance Policy
Section 10(10D) of the Income Tax Act, 1961 exempts the maturity proceeds of a life insurance policy from tax, provided the premium does not exceed 10% of the sum assured (for policies issued after April 1, 2012).
- 682,587 Views | Updated on: Oct 04, 2024
Life insurance is a critical component of financial planning, that provides security to policyholders and their families. One of the significant benefits of life insurance is the tax exemptions available under Sec 10(10D) of the Income Tax Act 1961. Section 10(10D) provision ensures that the payouts received from a life insurance policy are exempt from tax and subject to certain conditions. It is essential to understand 10(10D) income tax to make informed decisions about life insurance investments and maximize tax benefits.
What is Section 10(10D) of the Income Tax Act, 1961?
The Income Tax Act of 1961 includes several provisions designed to help taxpayers reduce their tax liabilities. One of the key sections in this regard is Section 10(10D), which focuses on the tax treatment of life insurance policy proceeds and affects the taxability of payouts received from life insurance policies and the potential tax benefits they can claim.
According to Section 10(10D), any sum received under a life insurance policy, including bonuses, is typically exempt from taxation, provided certain conditions are met. This means that maturity proceeds or death benefits from a life insurance policy can be tax-free, making it an advantageous option for financial planning.
To benefit from this tax exemption, the premium paid on policies purchased on or after April 1, 2012, must not exceed 10% of the sum assured during the policy term. Additionally, there was an amendment for Unit Linked Insurance Plans (ULIPs) purchased on or after February 1, 2021. For these ULIPs, the tax exemption on maturity is available if the premium does not exceed 10% of the sum assured in any year during the policy term and if the total premium paid in any year does not exceed ₹2,50,000.
Being aware of these conditions and exceptions is essential for policyholders to ensure that their policy proceeds remain fully exempt from tax. By leveraging the provisions of Section 10(10D), policyholders can enhance their tax savings while securing valuable financial protection for themselves and their families.
Background on Taxation Under Section 10(10D)
Section 10(10D) Income Tax Act 1961 deals with the taxation of life insurance policies. This section was introduced in the Finance Act 2003 and has undergone several amendments since then.
The main objective of Section 10(10D) is to provide tax benefits to policyholders who purchase life insurance policies. According to this section, the proceeds of a life insurance policy are exempt from tax if certain conditions like the following are met:
- The exemption applies only to policies that satisfy the minimum sum assured requirement.
- The sum assured should be at least 10 times the annual premium paid for policies issued on or after April 1, 2012, and 5 times the annual premium for policies issued before that date.
- It is applicable only if the policy is not surrendered or terminated during the policy term. If the policy is surrendered or terminated before the completion of the policy term, the exemption will not be available. However, the exemption will be available if the policy is surrendered or terminated due to the policyholder’s death.
Thirdly, the exemption applies only to policies issued on or after April 1, 2003. Policies issued before this date are not eligible for the exemption.
It is important to note that the exemption under Section 10(10D) applies only to the proceeds of a life insurance policy and not to the premiums paid. The premiums paid for a life insurance policy are not deductible from the policyholder’s taxable income.
Apart from the exemption under Section 10(10D), life insurance policies offer other tax benefits. The premiums paid for life insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act. The maximum deduction allowed under this section is ₹1.5 lakh per annum.
What are the Tax Exemptions Under Section 10(10D)?
Here are the various tax benefits available under Section 10(10D) of the Income Tax Act, 1961:
Eligibility Based on Premium Payments (Policy Purchased Between 1 April 2003 and 31 March 2012)
If you purchased an insurance policy within this period, you may qualify for tax exemptions under Section 10(10D), provided the annual premium paid does not exceed 20% of the sum assured under the policy.
Eligibility Based on Premium Payments (Policy Purchased After 1 April 2012)
For policies purchased after 1 April 2012, the eligibility criteria for tax exemption under Section 10(10D) have become more stringent. The premium paid in any financial year should not exceed 10% of the sum assured to qualify for the tax benefits.
Special Exemption for Policies Purchased Before 1 April 2013 (For Severely Disabled or Ill Individuals)
If the life insurance policy was obtained before 1 April 2013 and the insured person is either severely disabled or suffering from a critical illness, the premium amount can be up to 15% of the sum assured without losing eligibility for the tax exemption.
- Section 80U of the Income Tax Act specifies the disabilities that qualify for this higher exemption limit, including conditions such as developmental disorders, autism, and others.
- Section 80DDB lists the critical illnesses that fall under this category, allowing for the same tax relief.
Understanding Section 10(10D): Eligibility Criteria and Benefits
Section 10(10D) is designed to encourage people to invest in life insurance, and it provides policyholders with several tax benefits and exemptions.
Eligibility Criteria
The policyholder must meet certain criteria to be eligible for tax benefits under Section 10(10D). These include:
- The policy must be a life insurance policy, meaning it must provide coverage in the event of the policyholder’s death.
- The policy must be in force for a minimum of two years. If surrendered or canceled before this period, the tax benefits will not be available.
- The policy must be issued on or after April 1, 2012.
Benefits of Section 10(10D)
The main benefit of Section 10(10D) is that it offers tax exemption on the life insurance policy proceeds. This means that the death benefit paid to the nominee or legal heir of the policyholder will not be taxable. The maturity benefit the policyholder receives at the end of the policy term is also exempt from tax.
Section 10(10D) Exemption Towards Amount Received Under a Life Insurance Policy
Beyond just maturity benefits, Section 10(10D) also covers other amounts received under certain life insurance policies:
- Death Benefit: The sum assured received by the nominee upon the policyholder’s death is fully exempt from tax under Section 10(10D).
- Surrender Benefit: If the policyholder surrenders the policy before maturity, the surrender benefit received may be partially or fully taxable depending on the specific policy terms and conditions.
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.
Steps
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.
- Tax-free Death Benefit: The death benefit received by beneficiaries is completely tax-free, providing financial security without tax burdens.
- Tax Deduction on Premiums: Premiums paid for term insurance qualify for tax deductions under Section 80C, up to ₹1.5 lakhs per annum.
- High Coverage, Low Cost: Term insurance provides substantial coverage at low premiums.
- Financial Security for Dependents: Guarantees full sum assured to beneficiaries without tax deductions.
- No Upper Limit on Exemption: No upper limit on the tax exemption for the death benefit.
- Simplicity: Straightforward policies with clear tax benefits.
- Policies for Persons with Disabilities (Section 80U): Maturity benefits received under life insurance policies for individuals with disabilities are exempted from tax, regardless of the premium paid.
- Critical Illness Cover Riders: Additional benefits received under Critical Illness riders attached to life insurance policies are exempted from tax.
- Section 10D of the Income Tax Act governs tax exemptions on life insurance payouts, and understanding its terms is crucial for informed financial decisions.
- To avail of the benefits under the policy, life insurance must be in force for 2+ years and issued after April 1, 2012.
- Sec 10 (10D) of the Income Tax Act exempts the policyholder’s nominee or legal heir from paying taxes on the death benefit.
- This section helps monitor policy performance and stay updated on amendments to tax implications.
- As per the latest amendment, the maturity benefit of ULIPs issued after February 1, 2023, will only qualify for the Section 10(10D) tax exemption if the annual premium paid does not exceed ₹2.5 lakhs.
Advantages of Term Insurance Regarding Section 10(10D)
One of its significant advantages is the tax benefits associated with it under Section 10(10D) of the Income Tax Act of 1961. Here are the key advantages of term insurance regarding Section 10(10D):
Best Practices for Utilizing Section 10(10D)
Section 10(10D) is an important feature that allows policyholders to make partial withdrawals or loans against the policy’s cash value. This provision can be an essential tool for managing finances, but it is important to use it correctly to maximize its benefits. Best practices for utilizing Section 10(10D) of life insurance policies:
Understand the Policy’s Terms and Conditions
Before utilizing Section 10(10D) of a life insurance policy, it is essential to understand the terms and conditions of the policy. Review the policy document carefully, paying attention to the fees, interest rates, and any penalties associated with withdrawals or loans. It is also important to understand how the policy’s cash value is calculated, as this will determine the amount that can be withdrawn or borrowed. If you have any questions about the policy’s terms and conditions, contact your insurance provider or financial advisor for clarification.
Use Section 10(10D) Strategically
Section 10(10D) of a life insurance policy can be a valuable tool for managing finances, but it is essential to use it strategically. Consider using this provision to fund short-term expenses, such as a child’s college tuition or unexpected medical bills. However, it is important to remember that any withdrawals or loans against the policy’s cash value will reduce the death benefit paid to your beneficiaries. Therefore, it is best to use Section 10(10D) sparingly and only when necessary.
Deduction Limit under Section 10(10D)
Monitor the Policy’s Performance Regularly
Regularly monitor your life insurance policy’s performance and premium payments to ensure compliance with Section 10(10D) criteria. Adjust your premiums if necessary to maintain eligibility for tax exemptions.
Maturity Return Requirements Under Section 10(10D) of the Income Tax Act
Section 10(10D) of the Income Tax Act specifies exemptions from income tax on amounts received under life insurance policies. However, not all maturity returns automatically qualify for this exemption. To be exempt, the following conditions must be met:
Policy Issued Before April 1, 2012
For policies issued before this date, the premium paid compared to the sum assured is not limited. The entire maturity benefit received by the policyholder is tax-free.
Policy Issued After April 1, 2012
For policies issued after this date, the premium paid cannot exceed 10% of the sum assured for the maturity benefit to be exempt from tax. If the premium exceeds 10%, the portion exceeding 10% of the sum assured will be taxable as income.
Additional Exemptions
Certain specific types of policies offer additional exemptions regardless of the above conditions. These include:
Budget Amendment to Section 10(10D) for High Premium ULIPs
The recent Union Budget introduced provisions to address concerns about high-premium Unit-Linked Insurance Plans (ULIPs). These amendments limit the tax exemption under Section 10(10D) for ULIPs.
For ULIPs issued after February 1, 2023, only if the annual premium paid does not exceed ₹2.5 lakhs will the maturity benefit qualify for the tax exemption under Section 10(10D). If the premium exceeds ₹2.5 lakhs in any year, the maturity benefit will be partially taxable.
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.
Key Takeaways
FAQs on Section 10(10D) of Income Tax Act
1
What comes under Section 80U?
Section 80U covers medical expenses incurred for yourself, your spouse, dependent parents, and children. It also covers hospitalization, surgery, diagnostic tests, and treatment for specific diseases.
2
What comes under Section 80DDB?
Section 80DDB offers higher deductions for medical expenses related to specific ailments like cancer, neurological diseases, and kidney diseases. It applies to expenses for your parents or dependent parents.
3
What are some points to keep in mind regarding Section 10(10D) of the Income Tax Act?
Section 10(10D) exempts income from housing allowances received by government employees. It applies to allowances for rent, hostel, and other house-related expenses. Specific limits and conditions apply based on location and pay grade.
4
What is Section 10(10D) of Income Tax Act?
Section 10(10D) provides tax exemptions for any sum received under a life insurance policy, including death and maturity benefits, subject to certain conditions.
5
What is the Section 10(10D) exemption limit?
There is no upper limit on the exemption amount under Section 10(10D). However, the policy premiums must adhere to specified limits to qualify for the exemption.
6
What is the Section 10(10D) amendment in Budget 2023?
The Budget 2021 amendment stipulates that proceeds from ULIPs with annual premiums exceeding ₹2.5 lakhs will be taxable, aligning their tax treatment with that of mutual funds.
Suggested Readings
1
What comes under Section 80U?
Section 80U covers medical expenses incurred for yourself, your spouse, dependent parents, and children. It also covers hospitalization, surgery, diagnostic tests, and treatment for specific diseases.
2
What comes under Section 80DDB?
Section 80DDB offers higher deductions for medical expenses related to specific ailments like cancer, neurological diseases, and kidney diseases. It applies to expenses for your parents or dependent parents.
3
What are some points to keep in mind regarding Section 10(10D) of the Income Tax Act?
Section 10(10D) exempts income from housing allowances received by government employees. It applies to allowances for rent, hostel, and other house-related expenses. Specific limits and conditions apply based on location and pay grade.
4
What is Section 10(10D) of Income Tax Act?
Section 10(10D) provides tax exemptions for any sum received under a life insurance policy, including death and maturity benefits, subject to certain conditions.
5
What is the Section 10(10D) exemption limit?
There is no upper limit on the exemption amount under Section 10(10D). However, the policy premiums must adhere to specified limits to qualify for the exemption.
6
What is the Section 10(10D) amendment in Budget 2023?
The Budget 2021 amendment stipulates that proceeds from ULIPs with annual premiums exceeding ₹2.5 lakhs will be taxable, aligning their tax treatment with that of mutual funds.
Suggested Readings
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
- Guaranteed@ Income Benefit for upto 25 years
- Flexibility to choose income period
- Premium break for females on child birth or any listed specific illnesses
- Life cover for the premium payment period
- Enhance your life cover with rider offerings
ARN. No. KLI/23-24/E-BB/1201
Features
- Increasing Life Cover*
- Guaranteed^ Maturity Benefits
- Enhanced Protection Through Riders
- Tax Benefits
- Dual Benefits: Guaranteed^Maturity + Death benefits
Ref. No. KLI/22-23/E-BB/999
Also read
Calculator bookmarks
- ULIP Calculator
- Compound Interest Calculator
- Retirement Calculator
- SIP Calculator
- BMI Calculator
- HRA Calculator
- FD Calculator
- RD Calculator
- Gratuity Calculator
- PPF Calculator
- DASS 21 Calculator
- Term Insurance Calculator
- Human Life Value Calculator
- SWP Calculator
- Investment Calculator
- Pension Calculator
- Annuity Calculator
Term Insurance bookmarks
- Term Insurance
- What is Term Insurance?
- 1 Crore Term Insurance
- Term Plan with Return of Premium
- Claim Settlement Ratio
- 75 Lakh Term Insurance
- 50 Lakh Term Insurance
- 20 Year Term Insurance
- Term Insurance for Smokers
- Zero Cost Term Insurance
- Whole Life Insurance
- Critical Illness Term Insurance
- Term Insurance vs Life Insurance
- Joint Term Insurance
- Term Insurance Benefits
- 1.5 Crore Term Insurance
- Income Replacement Term Plan
Investment Bookmarks
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
Start saving today and enjoy guaranteed returns with our Savings Plans!
popular searches
- SIP Calculator
- Sukanya Samriddhi Yojana
- PPF Calculator
- TDS
- Income Tax Slab
- Term Insurance
- HRA Calculator
- Life Insurance
- Compound Interest Calculator
- Types of Insurance
- 80d Deduction
- BMI Calculator
- Term Insurance Calculator
- ULIP Plans
- What is Term Insurance
- ITR 1
- Income Tax Calculator
- What is ITR
- TDS Refund
- Gratuity Calculator
- Investment Plans
- Pmjjby Certificate Download
- ULIP Calculator
- What Is Tax
- Term Insurance vs Life Insurance
- ULIP Meaning
- Endowment Plan
- Income Tax Deductions
- One Time Investment Plans
- What Is Annuity
- Life Insurance Plans
- Savings Plans
- Short Term Investment Plans
- What is HRA
- 1 Crore Term Insurance
- ULIP Vs Mutual Fund
- Fixed Deposit Calculator
- What is IRDA
- Long Term Investment Plans
- 2 Crore Term Insurance
- Importance of Portfolio Management
- Invest in ULIP
- Term Insurance for Family
- Term Insurance for Housewife
- Benefits of ULIP
- Term Insurance for NRI
- Critical Illness Term Insurance
- ULIP Returns in 10 Years
- 10 Year Investment Plan
- Recurring Deposits Calculator
- Tips to Save Money
- 10 Lakh Investment Plan
- Personal Pension Plan
- Term Insurance for Women
- Insurance Riders
- 25 Lakh Term Insurance
- ULIP Returns in 20 Years
- 5 Year Term Insurance
- ULIP Returns in 15 Years
- 5 Lakh Term Insurance
- DASS 21 Calculator
- 1.5 Crore Term Insurance
- Best Savings Plan for the Middle Class
- Retirement & Pension Plans
- ULIP for Child Education