Life insurance policies provide your family with a safety net in the unfortunate event of your demise. It prevents a financial emergency from being thrust upon them. With an insurance plan, your loved ones receive monetary help to clear any outstanding liabilities or debts and free themselves.

However, money received as insurance benefits counts as income and falls under the ambit of income tax. But certain provisions in our taxation law provide specific exemptions, one of which is for payouts received through life insurance policies. An important provision that offers deductions is Section 10(10D) of the Income Tax Act, 1961.

What is Section 10(10D)?

Section 10(10D) of the Income Tax Act, 1961 lays out rules regarding the taxability of claims. Under Section 10(10D), claims such as the death benefit and other accrued bonuses arising out of life insurance policies are not taxed.

How Does Section 10(10D) Work?

Let us use a hypothetical scenario to understand how the tax-saving benefits of Section 10(10D) play out. For example, you have purchased a term life insurance policy on Finserv MARKETS from the comforts of your home and nominated your family member as the beneficiary. In the event of an unfortunate mishap, a death benefit will be allocated and earmarked to be disbursed to the nominated beneficiary.

Now, this lump sum might seem like an income, but it isn’t, and hence, it shouldn’t be treated like it. Section 10(10D) ensures that the amount of money set to be received by your family member will not be seen as an income. Instead, it will be exempt from the calculation of income for purposes of taxation. So, let’s understand some terms applicable to the tax benefits under Section 10(10D).

Terms and Conditions of Section 10(10D)

  • The premium should not be more than 10% of the assured sum for insurance plans bought after April 1, 2012.

  • Life insurance policies issued between April 1, 2003, and March 31, 2012, should have a premium of less than 20% of the assured sum.

  • Section 10(10D) is applicable to any amount paid out under the insurance plan. Be it in case of death of the policyholder, maturation of the plan, or other bonuses.

  • The benefits of this section also apply to any gains accruing out of Unit-Linked Insurance Plans (ULIPs), and Single Premium Life Insurance Policies (if the aforementioned conditions are met).

  • Benefits received by a person under a Keyman Insurance Policy are not eligible for deductions under this section.

  • Insurance premium should not exceed 15% of the sum assured for plans bought before April 1, 2013. This is applicable to the following individuals:

    •  

      Disabled or severely disabled persons as specified under Section 80U of the Income Tax Act, 1961.

       

    • Individuals suffering from ailments as specified under Section 80DDB of the Income Tax Act, 1961.

Eligibility Criteria for Section 10(10D) of the Income Tax Act

Keeping the above-mentioned terms and conditions in mind, learn the eligibility criteria for claiming tax deductions under Section 10(10D) of the Income Tax Act, 1961:

  1. Tax deductions under Section 10(10D) are available for life insurance claim payouts such as death benefit and maturity benefit, including accrued bonuses.

  2. Tax deductions under Section 10(10D) are applicable to all types of life insurance claim payouts.

  3. There is no upper limit applicable to the tax benefits available under Section 10(10D) of the Income Tax Act.

  4. Deductions are applicable to both foreign as well as Indian life insurance companies.

Points to Note About Section 10(10D)

Any sum received from your life insurance plan will be subject to Tax Deducted at Source (TDS) at 2% if the amount isn’t eligible for deductions under Section 10(10D). Moreover, if the insurance proceeds are taxable under Section 10(10D) but do not exceed ₹1 Lakh, then no TDS will be deducted. TDS is applicable in the following way:

  • 2% TDS will be deducted from the total amount if the PAN (Permanent Account Number) Card is submitted.

  • 20% TDS will be deducted from the total amount if PAN Card isn’t submitted.

Exclusions Under Section 10(10D) of the Income Tax Act

Here are some exceptions to Section 10(10D) of the Income Tax Act that you must keep in mind:

  • Sum received under the Keyman Insurance Plan.

  • Benefits received by individuals under Section 80DD(3) or 80DDA(3) of the Income Tax Act, 1961 are not applicable for deduction under Section 10(10D).

  • Amount received under an insurance policy bought on or after April 1, 2003, and on or before March 31, 2012, where the premiums exceed 20% of the sum assured for any year of the policy period.

  • Amount received under an insurance policy bought after April 1, 2012, where the premiums exceed 10% of the sum assured for any year of the policy period.

Benefits of Term Insurance Regarding Section 10(10D)

Term insurance is a type of life insurance policy that is active for a specific predetermined period. If during the continuity of this period, the policyholder dies, the benefit is paid to their nominee.

A great plan to purchase is the Bajaj Allianz term insurance available on Finserv MARKETS. With the Bajaj Allianz Life Smart Protect Goal Term Plan, you can get coverage of ₹1 crore at low premiums. You can also avail enhanced coverage by opting for the Critical Insurance Cover, Child Education Cover, Accidental Death Benefits or Accidental Total Permanent Disability. You can not only avail tax benefits under Section 10(10D) for this particular plan but also be eligible for deductions on the premium paid, under Section 80C.

Bottom Line

Now that you know the tax-saving benefits that Section 10(10D) offers, you can be worry-free when it comes to the future of your loved ones. However, it is recommended to read your policy documents carefully and understand the terms and exclusions before purchasing it.

If you still haven’t opted for a term insurance plan to safeguard your dependents, head on to Finserv MARKETS right away! Furthermore, you can estimate your insurance premiums beforehand with our term insurance calculator.

FAQs on Section 10(10D) Tax Benefits

  • ✔️What is the maximum Section 10(10D) tax exemption available?

    There is no maximum limit to the amount you can claim for deduction under Section 10(10D) of the Income Tax Act, 1961.

  • ✔️What are other tax benefits available under life insurance plans?

    Another tax benefit that you avail on your insurance plan is under Section 80C of the Income Tax Act, 1961. The premiums paid towards your policy can be claimed under Section 80C where the maximum cap for deductions is ₹1.5 lakh.

  • ✔️What is TDS?

    TDS or Tax Deducted at Source is the income tax deducted from an amount during a specific payment. It is applicable to multiple types of payments such as a salary, interest payment by banks, earned commission, rent, etc. where the person receiving such income is liable to pay the income tax.

  • ✔️Does Finserv MARKETS offer life insurance plans online?

    Yes. You can simply buy term insurance by heading over to our platform or using our insurance app for easier access.

  • ✔️How can I buy a term insurance plan online?

    You can purchase term insurance online on Finserv MARKETS in the following way:

    1. Go to the ‘Term Insurance’ section on Finserv MARKETS

    2. Fill in the application form with accurate details

    3. Review the policy terms and conditions

    4. Add any insurance riders to maximise coverage

    5. Pay the premium online

    You are done!

     

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