Section 10(10D) of Income Tax Act - Benefits & Conditions

Life insurance not only provides financial security but also helps mitigate tax liabilities through exemptions on income tax. Amongst several tax saving measures, several deductions under the Income Tax (IT) Act, 1961, are some of the best.

Section 10(10D) of the IT Act, 1961 provides tax savings benefits. The income amount you receive from your life insurance policy can be exempted from tax under this section. The deductions under this are available for every kind of life insurance plan payout.

Since there is no involvement of any upper limit under this section and it comprises several bonuses and surrender values, Section 10(10D) is one of the most beneficial sections of the IT Act. Read on to know more about this section so that you can maximise your tax-saving benefits.

Section 10(10D) of the Income Tax Act

U/S 10(10D) of the IT Act, 1961, a resident individual can claim the tax exemptions on the assured sum and the accrued bonus received through their life insurance plan payouts (death or maturity benefits), if any. This tax exemption is also valid on the returns earned from a Unique Linked Insurance Plan (ULIP). It is also present in every form related to life insurance policy claims.

Hindu Undivided Families (HUFs), salaried and non-salaried individuals, corporations, foreign companies, Body of Persons, and others are eligible for these tax exemptions.

Analysing the Exemption Provisions Under Section 10(10D)

1. Tax Rebate on Life Insurance Plan

You can claim the tax exemptions under this section if the life insurance policy premiums paid in a single policy year do not exceed 20%*(sum assured for an insurance policy bought between April 1, 2003, and March 31, 2012).

You must note that if the life insurance policy is bought after April 1, 2012, the amount of premium should not be more than 10%*assured sum. If you are a policyholder who is suffering from diseases or are severely disabled, the tax exemption on an insurance policy purchased before April 1, 2013, shall not exceed 15%*assured sum.
Disabilities such as autism, retardation, etc. that belong to this category have been mentioned u/s 80U of the IT Act, 1961.
Diseases which are considered under this tax exemption shall be specified under section 80DDB of the IT Act, 1961.

2. TDS on a Life Insurance Policy

If the amount received from your life insurance plan exceeds Rs. 1,00,000 on those policies which don’t fall under exemption u/s 10(10D), the TDS shall be deducted at 1% by the insurance provider prior to the payment. The TDS deduction also takes place on the bonus payments. Besides, if the received amount is below Rs. 1,00,000, no TDS will be deducted. This amount is totally taxable and you can also claim credits for TDS deductions through your Income Tax Return filings.

3. Tax Liability of Single Premium Insurance Policies

The amount of maturity earned through a single premium insurance plan can be taxed and not get exempted u/s 10(10D) of the IT Act, 1961. However, its amount of maturity benefits will be free of tax only if the minimum assured sum is 10x the single premium sum paid for the tenure of the insurance policy.

4. Requirements Under Section 10(10D) For Maturity Returns

The following criteria must be fulfilled by the maturity payout to enjoy the tax saving benefits under this section:

The benefit amount should be the death payout.
The benefit amount which has been received is not for an insurance policy issued u/s 80DD (3) of the IT Act, 1961.
This payout should not have been available under the Keyman Insurance Policy.
It should not be a pension plan payout or an annuity.
The benefit amount has not been received under the group insurance scheme.
The premium amount which has been paid during any financial year should not be more than 20% of the assured sum for the policies which had been bought between April 1, 2003 and April 30, 2012. For the insurance policies purchased after April 30, 2012, the amount of premium must not exceed 10% of the assured sum.
The insurance premium amount which is payable during any financial year must not be more than 15%*assured sum for the insurance policy. The policy must have been bought on or after April 1, 2013, and it should be for the life of a person, who is:

A disabled or severely disabled individual according to section 80U of the IT Act, 1961.
Has a disease or an ailment which has been specified in the rules u/s 80DDB of the IT Act, 1961.
If the maturity amount of your insurance policy is not tax-exempt u/s 10(10D) of the IT Act, 1961, the amount which you will receive will be subject to TDS according to the following rules:

I. If your PAN card has been submitted, then 10% TDS will be deducted from your total amount of maturity.
II. If your PAN card has not been submitted, then 20% TDS will be deducted from your total maturity amount.

5. How Does Section 10(10D) Work?

Let us try and understand how the tax-saving benefits of Section 10(10D) of the Income Tax Act, 1961, pan out by using a hypothetical scenario. Let’s take an example. Suppose you buy a life insurance plan and nominate your spouse as a beneficiary. In case of an unfortunate event, a death benefit will be earmarked and allocated to be disbursed to the spouse.

This amount which has been disbursed might look like an income but since it is not, it must not be treated as that either. This is where Section 10(10D) comes into force. It makes sure that this particular amount is not considered as an income. It shall be exempted from income tax deductions under section 10(10D) of the IT Act, 1961.

6. Terms and Conditions of Section 10(10D)

Here are a few terms and conditions you must follow to enjoy the tax saving benefits under Section 10(10D):

For life insurance plans that were bought between April 1, 2003 and March 31, 2012, the premium paid, for any given year during the plan’s term, can not be above 20% of the sum assured.
For the life insurance policies that were purchased after April 1, 2012, the premium paid, can not be above 10% of the sum assured.
All claims, including maturity benefit,death benefit, and bonuses received are exempt from income tax deductions.
Both death and maturity benefits that are made under the Keyman insurance plan are not eligible for income tax exemption under Section 10(10D). A Keyman insurance plan is made available by organisations or companies to protect themselves from financial loss in case of the sudden death of a ‘key' organisation employee. Key man refers to a key employee.
In the event of the individual insured suffering from a disease or being severely disabled or and the policy issued after April 1, 2013, the premium paid should not be above 15% of the sum assured. Section 80U specifies the disabilities, such as autism, mental retardation, etc., while Section 80DDB mentions the diseases.

Budget 2021 Amendment For This Section

A key amendment was introduced during the Budget 2021 under the 4th proviso to Section 10(10D). This is applicable to ULIPs (Unit Linked Insurance Plans) with a high annual premium amount. According to this amendment, exemption under section 10(10D) is not applicable to the ULIPs which have been issued on or after February 1, 2021. This is valid if the annual premium amount which is payable is more than Rs. 2,50,000 in any particular financial year during the tenure of the policy.

The announcement of the Budget also introduced a fifth proviso covering the instances of a single individual paying the premiums for several ULIPs. The annual premium payment limit of Rs. 2,50,000 can also be applicable in such a case. Hence, according to this section’s amendment, the policyholder is eligible to claim the benefits under section 10(10D) only for the insurance plans in which the aggregate annual premium paid is less than Rs. 2,50,000. However, such exclusions are not applicable in cases of ULIP payouts which have been received as a death benefit of the person who has been insured.

Eligibility Criteria

Here are a few conditions which you must fulfil to be eligible for claiming tax deductions u/s 10(10D):

Tax deductions under this section are applicable to every type of life insurance claim payouts.
Tax deductions under this section is available for life insurance claim amounts like maturity and death benefit, including all the accrued bonuses.
There is no limit to the tax benefits that can be availed u/s 10(10D) of the Income Tax Act, 1961.
Deductions are applicable to both Indian and foreign life insurance companies.

Exclusions Under Section 10(10D) of the IT Act

Here are a few exemptions under section 10(10D) of the Income Tax Act, 1961:

Payout received for the Keyman Insurance Policy.
Benefits that are received by individuals under the Section 80DDA(3) or 80DD(3) of the IT Act, 1961 that are not applicable for tax deductions under this section.
Payout that was received from an insurance policy issued after April 1, 2012, where the premium exceeded 10% of the sum assured for the policy period.
Payout that is received for an insurance policy that was issued between April 1, 2003, to March 31, 2012, where the premium exceeded 20% of the sum assured for the policy period.

Benefits of Term Insurance Regarding Section 10(10D)

Term insurance is a form of life insurance policy that is only active for a predetermined period of time. If during this time, the insured individual passes away, then the benefit is paid out to the nominee.

You can not only enjoy the tax benefits under this section for Term Insurance Plan but you are also eligible for any deductions on the premium paid, under Section 80C.

Deduction Limit Under this Section

Tax deductions are applicable across all life insurance policy claims. This also comprises accrued bonuses. There is no limit for deductions on tax under this section.

Now that you are aware of the tax-saving benefits of the Section 10(10D), you do not have to fret about the future of your family. It is, however, strongly recommended to go through the policy documents carefully and understand the terms and conditions before buying the plan.

Maximum number of people have been buying insurance as a tax-saving or tax-planning tool for years now. However, the real reason for such benefits is to provide an incentive to enable more individuals to buy insurance coverages. Hence, it is advisable that you pay under the various tax benefits which are available under several sections in the Income Tax Act, 1961.

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One other tax benefit that you can enjoy on your life insurance policy is under Section 80C of the IT Act, 1961. The premium that you pay towards the policy can be claimed under this section and the maximum cap is Rs.1.5 lakhs.

There is no limit for the tax deductions under Section 10 (10D) of Income Tax Act, 1961.

There is no maximum cap to the amount that you can claim for deduction under Section 10(10D) of the IT Act, 1961.

Tax Deducted at Source or TDS is the tax that is deducted from the income during a specific payment. It is applicable to a variety of payments such as an interest payment by banks, salary, earned commission, etc. where the individual receiving this income has to pay income tax.