Section 10(10D) of Income Tax Act – Life Insurance Tax Exemption Rules & Deductions

Section 10(10D) of the Income Tax Act exempts any sum received under a life insurance policy, including bonuses, from income tax, provided the premium paid does not exceed 10% of the sum assured (for policies issued after 1 April 2012) or 20% (for policies issued before 1 April 2012). This applies to ULIPs, endowment policies, and traditional life insurance, subject to specific conditions.

What is Section 10(10D)?

Section 10(10D) of the Income Tax Act is a provision that exempts any sum received under a life insurance policy, including any bonus, upon maturity or surrender of the policy or as a death benefit from tax, subject to certain conditions regarding the premium paid in relation to the sum assured. This exemption applies to traditional life insurance policies, ULIPs, and endowment plans, ensuring tax-free proceeds if the specified conditions are met.

Conditions for Exemption Under Section 10(10D)

The following conditions need to be fulfilled to claim an exemption under Section 10(10D):

Insurance Premium Limit

The annual premium for policies issued after 1st April 2012 should exceed 10% of the actual sum assured. However, for policies issued between 1st April 2003 and 31st March 2012, the annual premium should not exceed 20% of the actual sum assured. 

This shall not be applicable for the sum received on the death of the person.

Policy Type

This is applicable for ULIPs, endowment plans, money-back policies, and term insurance with maturity benefits. 

However, for ULPIs issued after 1st February 202, exemption under Section 10(10D) will be available if the premium paid in any of the previous years does not exceed Rs. 2.5 lakh. For ULIPs issued after 1st February 2023, the premium paid in any of the previous years should not exceed Rs. 5 lakh. 

Death Benefits

The sum received on the death of the insurer is always tax-free irrespective of the premium paid.  

When is Life Insurance Proceeds Taxable?

The sum received from Life Insurance becomes taxable in the following situation:

• As per section 10(10D), in case of a life insurance policy issued after 1 April 2003 but on or before 31 March 2012, if the premium payable exceeded 20% of the actual sum assured, the maturity proceeds are taxable in the hands of the insured.
• In case the life insurance policy is issued after 1 April 2012 and the premium payable exceeds 10% of the actual sum assured, the maturity proceeds are taxable. 
• In case the life insurance policy is issued after 1 April 2013 on the life of a person with a disability or a disease specified under Sections 80U and 80DDB, respectively, if the premium payable exceeds 15% of the actual sum assured, the maturity proceeds are taxable. 

However, please note that in the case of the death of the insured, where the nominees receive the policy maturity proceeds, it will be tax-free in the hands of the nominees even if the premium paid in any year crosses the above-prescribed percentage of the sum assured.

Tax Benefits on Life Insurance Policy

Apart from the exemption under Section 10(10D), the Income Tax Act offers a deduction against the premium paid on Life Insurance policies under Section 80C. Under Section 80C, taxpayers can claim a deduction up to Rs. 1.5 lakh against life insurance premium paid. However, this deduction is available only under the old tax regime. Section 80C deduction is not allowed under the new tax regime. 

It is important to note that the premium paid for a life insurance policy from any insurance agency recognised by the IRDA is eligible for Section 80C deduction and not just LIC life insurance policies.   

TDS on Life Insurance Policy

If the amount received from a life insurance policy is more than Rs 1 lakh on policies not covered under an exemption under Section 10(10D), then TDS @ 2% under Section 194DA shall be deducted by the insurer before making this payment. TDS will also be deducted on bonus payments. 

If the amount received is less than Rs 1,00,000, no TDS shall be deducted, but the amount received shall be fully taxable for you. You can claim credit for the TDS deducted in your Income Tax Return. 

Example on Taxability of Life Insurance

Mr. A took a life insurance policy from a recognised insurer on 31st July 2015. The premium for the policy is Rs. 40,000 and the sum assured is Rs. 5 lakh. 

Since the policy is taken after 1st April 2012, the premium paid should not exceed 10% of the sum assured. In the case of Mr. A

Premium % is 8% i.e., (40,000/5,00,000)*100.

Therefore, as the premium paid is less than 10% of the sum assured, the maturity amount is fully exempt under Section 10(10D) and there is no TDS under Section 194DA.