Exemptions and Amendments under Section 10(10D)

Under Section 10(10D) of the Income Tax Act, 1961, residents can claim tax exemptions on life insurance payouts, including the sum assured and accrued bonus. These payouts include death and maturity benefits. There is no limit for deductions on tax under this section.

This tax exemption is also valid on the returns earned from a Unique Linked Insurance Plan (ULIP). The tax exemption under Section 10(10D) is applicable to all types of life insurance. These deductions are applicable to both Indian and foreign life insurance companies

Section 10(10D) of the Income Tax Act provides specific provisions regarding the tax treatment of proceeds received from life insurance policies. These provisions outline when such payouts are exempt from tax and under what conditions tax liabilities or deductions at source (TDS) may apply. Understanding these rules is essential for policyholders to effectively manage their tax obligations related to life insurance.

Let’s take a look at the key aspects of taxation under this provision:

Tax Rebate on Life Insurance Plan

Here’s an overview of the parameters a policyholder’s life insurance must meet to be eligible for tax rebate.

*Note: To be eligible, the policyholder must also have an illness or severe disability.  

TDS on a Life Insurance Policy

If the amount received from the life insurance plan, not covered u/s 10(10D), exceeds ₹1 Lakh, 1% TDS is deducted by the insurer. The TDS deduction is also incurred on the bonus payments.  On the other hand, if the sum is below ₹1 Lakh, there is no TDS exemption. This amount is fully taxable and you can claim your credits for deductions under TDS through filings on your Income Tax Return (ITR).

Under Section 10(10D), if the insurance policy's maturity amount is not tax-exempt,  TDS rules apply to the received amount as follows:

• If PAN card has been submitted: 10% TDS will be deducted from your total amount of maturity

• If PAN card has not been submitted: 20% TDS will be deducted from your total maturity amount

Tax Liability of Single Premium Insurance Policies

A single premium policy requires the policyholder to pay the entire premium amount upfront at the policy's start. Given the higher premium of single premium policies compared to yearly premiums, it may more likely exceed the 10% limit under Section 10(10D).

However, if the minimum sum assured is 10 times the single premium paid for the entire tenure of the policy, it is tax-free. 

Requirements For Maturity Returns

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

• The exemption under Section 10(10D) applies to sums received from life insurance policies, including death benefits, maturity proceeds, and bonuses, except for certain exclusions like Keyman insurance and group insurance schemes.
  

• The benefit amount should not be from a Keyman insurance policy or a group insurance scheme, as these are excluded from exemption.
  

• The payout must not be linked to pension or annuity plans, which are treated differently under tax laws.
  

• The premium payable during any financial year of the policy term must not cross the threshold of 10% of the sum that is assured specifically for the policies that were issued on or beyond April 1, 2012. For policies issued between April 1, 2003, and March 31, 2012, this limit was 20%. For persons with specified disabilities or diseases (under Sections 80U and 80DDB), the limit is 15% for policies issued on or after April 1, 2013.
  

• For non-ULIP life insurance policies issued on or after April 1, 2023, the aggregate annual premium paid across all such policies should not exceed ₹5 Lakhs to qualify for exemption.
  

• For ULIP policies issued on or after February 1, 2021, if the aggregate annual premium exceeds ₹2.5 lakhs, the maturity proceeds lose tax exemption and are taxable as capital gains; however, death benefits remain fully exempt.
  

• The exemption applies to both maturity and death benefits, except for policies issued under Section 80DD(3), which are excluded.
  

• The death benefit received by the nominee is always tax-free under Section 10(10D), regardless of premium limits

*Note: The policy must have been bought on or after April 1, 2013, and it should be for the life of a person, who meets the below criteria:

1. Individual must be disabled or severely disabled according to Section 80U  

2. Individual must have a disease or an ailment which has been specified in the rules u/s 80DDB

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 under sections 80DDA(3) or 80DD(3) that are not applicable for deductions u/s 10(10D)

• Payout from insurance policy issued post April 1, 2012, with premium exceeding 10% of the sum assured

• Payout for policies issued from April 1, 2003, to March 31, 2012, with premiums exceeding 20% of the sum assured

Recent amendments to Section 10(10D) have introduced significant changes to the tax exemption framework for life insurance policy proceeds, particularly concerning policies issued by IFSC insurance offices and premium thresholds for ULIPs and other policies. These changes aim to clarify exemption conditions and expand tax benefits for certain categories of policyholders.

The key amendments and their implications are detailed below:

Union Budget 2021 

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 for annual premiums exceeding ₹2.50 Lakhs in a financial year during the policy tenure. 

The Budget announcement also introduced a fifth provision covering the instances of a single individual paying the premiums for several ULIPs. The annual premium payment limit of ₹2.50 Lakhs can also be applicable in such a case. 

Hence, the policyholder can claim Section 10(10D) benefits only if the aggregate annual premium paid is below ₹2.50 Lakhs. However, such exclusions are not applicable in cases of ULIP payouts which have been received as a death benefit.

Finance Act, 2023 

The amendment eliminated the exemption for the sum received from a life insurance policy. This is in the event that the total premium for policies, issued on or after April 1, 2023, exceeds ₹5 Lakhs. 

The Central Board of Direct Taxes notified of the same in a circular on August 16. It clarified that if the premium is payable for multiple policies issued on or after April 1, the exemption is only applicable under certain conditions. Here, the aggregate premium must not surpass ₹5 Lakhs for any of the years prior during the tenure of these policies.

While Section 10(10D) offers tax exemption on life insurance proceeds, failure to meet its conditions can lead to taxation of the maturity or surrender amount. Understanding these implications helps policyholders plan their investments and tax liabilities effectively.

Here are the key tax consequences when exemption conditions are not satisfied:

Maturity Proceeds Taxed as Income

If premium limits or other conditions are breached, maturity proceeds from non-ULIP policies are taxed as income from other sources.

ULIP Maturity Taxed as Capital Gains

For ULIPs exceeding the ₹2.5 Lakh annual premium limit, maturity proceeds are treated as capital gains and taxed accordingly.

Death Benefits Remain Exempt

Regardless of premium thresholds or conditions, death benefits paid to nominees continue to be fully exempt from tax.

TDS Deduction on Taxable Proceeds

If the maturity amount is taxable, insurers deduct TDS—typically 10% if PAN is submitted, or 20% if not—before payout.