Section 10(10D) of the Income Tax Act, 1961, is a crucial provision that allows for tax exemption on the proceeds received from a life insurance policy. This includes not only the maturity amount but also any bonuses accrued during the policy term. However, the exemption is subject to certain conditions regarding the premium paid, the sum assured, the type of policy, and the date of issuance. Understanding these nuances is essential for both policyholders and beneficiaries to ensure they maximize their tax benefits and avoid unexpected tax liabilities.
Key Conditions for Exemption under Section 10(10D)
- For policies issued after April 1, 2012:
The annual premium paid in any year should not exceed 10% of the sum assured for the maturity amount to be fully exempt from tax. - For policies issued between April 1, 2003, and March 31, 2012:
The premium paid in any year should not exceed 20% of the sum assured. - For policies issued after April 1, 2023 (non-ULIP):
The annual premium should not exceed ₹5 lakh in any year during the policy tenure to claim full exemption. - For ULIPs issued after February 1, 2021:
The annual premium should not exceed ₹2.5 lakh in any year to claim full exemption. - For policies covering persons with severe disability or specified diseases:
The premium threshold is 15% of the sum assured for policies issued on or after April 1, 2013. - Death benefit:
Any amount received by the nominee on the death of the insured is always tax-free, regardless of the premium-to-sum-assured ratio or the type of policy. - If the premium exceeds the prescribed limit, only the amount received over and above the total premiums paid is taxable as “Income from Other Sources”.
Example 1: Policy Qualifies for Section 10(10D) Exemption
Scenario:
Mr. X buys a traditional life insurance policy on April 1, 2022.
- Sum Assured: ₹10,00,000
- Annual Premium: ₹1,00,000
- Policy Term: 10 years
- Maturity Amount (including bonus): ₹13,00,000
Calculation:
- 10% of Sum Assured = ₹1,00,000
- Annual premium paid = ₹1,00,000 (equals 10% of sum assured, so within the limit)
Tax Treatment:
Since the annual premium does not exceed 10% of the sum assured, the entire maturity amount of ₹13,00,000 (including any bonuses) is fully exempt from tax under Section 10(10D).
Example 2: Policy Does NOT Qualify for Section 10(10D) Exemption
Scenario:
Ms. A buys a life insurance policy on April 1, 2022.
- Sum Assured: ₹5,00,000
- Annual Premium: ₹80,000
- Policy Term: 10 years
- Maturity Amount (including bonus): ₹9,00,000
Calculation:
- 10% of Sum Assured = ₹50,000
- Annual premium paid = ₹80,000 (exceeds 10% of sum assured)
Tax Treatment:
Section 10(10D) exemption is not available because the premium exceeds the threshold.
- Total Premium Paid: ₹80,000 × 10 = ₹8,00,000
- Taxable Income: ₹9,00,000 (maturity) – ₹8,00,000 (total premium) = ₹1,00,000
This ₹1,00,000 is taxable as “Income from Other Sources” in the year of maturity. Additionally, if the maturity amount exceeds ₹1 lakh, the insurer is required to deduct TDS at 2% on the taxable portion before payout.
Special Cases and Additional Points
- Severe Disability/Specified Diseases:
For policies issued on or after April 1, 2013, covering persons with severe disabilities (as per Section 80U) or specified diseases (as per Section 80DDB), the premium threshold is relaxed to 15% of the sum assured. - ULIPs and High-Premium Policies:
For ULIPs issued after February 1, 2021, the annual premium limit is ₹2.5 lakh. For non-ULIP policies issued after April 1, 2023, the limit is ₹5 lakh per annum. - Single Premium Policies:
The same percentage limits apply to single premium policies for exemption eligibility. - Death Benefit:
Regardless of premium or sum assured, the payout received by the nominee on the death of the policyholder is always exempt under Section 10(10D).
Summary Table
| Policy Condition | Exemption Status | Taxability at Maturity |
| Premium ≤ 10% of sum assured (post-2012) | Fully exempt under 10(10D) | No tax on maturity |
| Premium > 10% of sum assured | Not exempt under 10(10D) | Tax on (Maturity – Total Premiums) |
| Death benefit (any case) | Always exempt | No tax |
| ULIP premium > ₹2.5 lakh/year | Not exempt | Tax on (Maturity – Premiums paid) |
| Non-ULIP premium > ₹5 lakh/year (post-2023) | Not exempt | Tax on (Maturity – Premiums paid) |
Conclusion
Section 10(10D) can make your life insurance maturity proceeds completely tax-free, provided you meet the premium-to-sum-assured ratio and other specified conditions. If the premium exceeds the threshold, only the profit (maturity minus total premiums paid) is taxable as income from other sources. Always check your policy’s premium and sum assured ratio, as well as the issue date, to determine taxability at maturity. For complex cases or high-value policies, consulting a tax advisor is recommended to optimize your tax benefits.
