Section 10(10D): Eligibility Criteria, Exemptions & Exclusions

What is Section 10(10D)?

Section 10(10D) of the Income Tax Act, 1961 provides tax exemption on the maturity amount, death benefits, or bonuses received under a life insurance policy. This means that any payout from a life insurance policy is tax-free, provided the conditions under this section are met.

This exemption applies to all types of life insurance policies, including:

• Term Insurance
• Endowment Policies
• Money Back Policies
• Unit Linked Insurance Plans (ULIPs)

Key Point: The exemption applies to both resident and non-resident taxpayers who receive a payout from a life insurance policy.

Exclusions Under Section 10(10D)

To qualify for tax exemption under Section 10(10D), the following conditions must be met:

1. Policy Premium Limit:

• For policies issued before April 1, 2012, the premium paid should not exceed 20% of the sum assured.
• For policies issued on or after April 1, 2012, the premium should not exceed 10% of the sum assured.
• For policies issued on or after April 1, 2023, the tax exemption applies only if the aggregate premium does not exceed ₹5 lakh in a financial year.

2. Death Benefit:

• The death benefit received by the nominee or legal heir in case of the policyholder's demise is always tax-free, regardless of the premium amount or sum assured.

3. Keyman Insurance Policy:

• If the life insurance policy is taken by an employer on the life of an employee (Keyman Insurance Policy), then the maturity proceeds are fully taxable.

4. TDS Applicability (Section 194DA):

• If the premium paid exceeds the prescribed limits, TDS under Section 194DA is 5% on the income portion (i.e., maturity amount minus total premiums paid).

Taxability of Life Insurance Proceeds Under Section 10(10D)

The tax implications of a life insurance payout depend on whether the policy qualifies for an exemption.

1. Tax-Free Life Insurance Proceeds

• A life insurance payout is completely tax-free if:
• The premium does not exceed 10% of the sum assured for policies issued after April 1, 2012.
• The premium does not exceed 20% of the sum assured for policies issued before April 1, 2012.
• The policy is taken for a disabled person under Section 80U or a disease-covered individual under Section 80DDB (limit: 15% of sum assured).

2. Taxable Life Insurance Proceeds

• A life insurance payout becomes taxable if:
• The annual premium exceeds the prescribed limits.
• The policy is a Keyman Insurance Policy.
• It is a ULIP where the total premium paid in a financial year is above ₹2.5 lakh (for policies issued after Feb 1, 2021).

Note: If the proceeds are taxable, TDS at 5% is deducted under Section 194DA, but only on the total maturity amount and not on net gains.

Example Calculation of Tax Under Section 10(10D)

Example 1: Tax-Free Maturity Proceeds

Ramesh buys a life insurance policy in 2015 with:

• Sum assured: ₹10 lakh
• Annual premium: ₹90,000 (less than 10% of sum assured)
• Maturity benefit received: ₹15 lakh

Since the premium does not exceed 10% of the sum assured, the entire ₹15 lakh maturity amount is tax-free under Section 10(10D).

Example 2: Taxable Maturity Proceeds

Neha buys a ULIP in 2022 with:

• Annual premium: ₹3 lakh (exceeds ₹2.5 lakh ULIP threshold)
• Maturity amount received in 2032: ₹40 lakh

Since her premium exceeds the prescribed limit, the maturity proceeds are taxable as capital gains under the new ULIP taxation rules.

Advantages of Section 10(10D)

1. Complete Tax-Free Benefit: Ensures tax savings on insurance maturity and death benefits.
2. Encourages Life Insurance Investment: Motivates individuals to secure their family’s financial future.
3. No Maximum Limit for Exemption: As long as conditions are met, there is no cap on the tax-free amount.
4. Applicable to All Types of Policies: Covers term plans, endowment plans, money-back plans, and ULIPs.

When Is Life Insurance Proceeds Taxable?

Life insurance proceeds are generally not taxable in the hands of the beneficiary under Indian tax laws. However, there are specific circumstances where part of the proceeds can become taxable:

• When the policy was acquired for consideration (premium) that is excessively high relative to the risk involved (typically where the premium paid is more than 20% of the actual sum assured for policies issued on or after 1 April 2012). In such cases, the benefit may be treated as income and taxed accordingly.
• If the policy is assigned to someone else for consideration, the amount received by the assignee may be taxable depending on the nature of the transaction.
• Other income components, such as accumulated bonuses or interest on delayed payments, may be taxable if they do not qualify for exemption under the relevant provisions.

Understanding these exceptions helps clarify when life insurance payouts may attract tax, rather than automatically assuming all benefits are exempt.

What Are The Tax Exemptions Under Section 10(10D)?

Section 10(10D) of the Income Tax Act provides a tax exemption for life insurance policy payouts in the hands of the recipient, subject to certain conditions. The key exemptions include:

• Death Benefit: The amount received by a nominee or beneficiary on the death of the insured person is fully exempt from tax.
• Maturity Proceeds: Amounts received on the maturity of a life insurance policy, including any bonuses, are generally exempt provided the policy meets prescribed conditions.
• Bonus and Add-Ons: Bonuses or additional benefits accruing under the policy are also covered by the exemption, so long as they form part of the proceeds of a qualifying life insurance policy.
• Policy Conditions: The exemption applies where the policy is not treated as a “modified endowment contract” under tax rules - in practice, this often means that the total premiums paid during the term of the policy should not be disproportionately high relative to the sum assured.

These exemptions make Section 10(10D) a key provision for taxpayers holding life insurance policies. It ensures that, in most typical cases, the financial support provided by life insurance, either during maturity or on death - passes to the policyholder or their family without creating a tax liability.

Limitations of Section 10(10D)

1. Premium Limits Apply:

• If premium exceeds 10% (or 20% for older policies), benefits become taxable.

2. ULIP Taxation Rules:

• New ULIP rules limit tax-free status if the premium exceeds ₹2.5 lakh per year.

3. TDS Deduction:

• If conditions are not met, TDS at 5% applies under Section 194DA.

Conclusion

Section 10(10D) provides significant tax relief on life insurance payouts, making it a valuable provision for taxpayers. However, it is crucial to ensure that the premium-to-sum assured ratio meets the prescribed limits to enjoy full tax exemption.

By understanding the benefits and conditions of Section 10(10D), taxpayers can plan their investments wisely and avoid unnecessary tax liabilities. For those seeking tax-efficient financial security, life insurance policies under this section remain a smart choice.