Tax Savings Under Section 10 (10D): Exemptions & Payouts

Section 10 (10D) of Income Tax Act, 1961

The Government of India introduced Section 10 under the Income Tax Act, 1961 to provide significant relief on the income and benefits earned from various sources. Among various provisions included under Section 10, Section 10 (10D) plays a major role in providing financial relief to policyholders.

Besides considering the tax deductions under Section 80C and 80D for premium payment for life and health insurance policies, you can invest in various types of life insurance plans and ULIPs to gain tax relaxation on the payouts/ benefits you or your beneficiaries receive. 

Further in this article, we discuss what is under Section 10 (10D), its limit, and how it benefits an investor for various life insurance policies benefits.

What is Section 10 (10D)?

Section 10 (10D) of the Income Tax Act, 1961, specifies the taxability under which the lump-sum payment received on various life insurance claims at the time of death, maturity, survival, or surrender are subject to tax-exemption. The exemption also applies to the accrued bonuses. 

Individuals, including salaried or non-salaried individuals, associations, Hindu Undivided Families (HUFs), bodies of persons, trusts, foreign companies, and others, can claim these exemptions. 

What is Section 10 (10D) Limit?

Before the Finance Act 2023 amendment, there was no cap on the amount of annual premium paid in any year during the policy term (except for ULIPs). This meant the total benefits received from the life insurance policy/ policies were fully tax-exempted under Section 10 (10D). 

Through the Finance Act 2023 amendment, CBDT issued the guidelines on tax exemption under Section 10 (10D) for the policies issued on or after April 1, 2023. As per the latest guidelines, the benefits received from the life insurance policies (ULIPs excluded) are withdrawn from the exemption if the total premium payable in any tax year during the policy/ policies tenure is more than Rs. 5 Lakhs (except for the amount received on the death of the policyholder). 

Hence, the income from such non-exempt policies is considered income from other sources and fully taxable. If the policyholder invests in multiple insurance policies, the tax exemption is available only to the policy/ policies where the aggregate premium does not exceed Rs. 5 Lakhs.

Additionally, 10 (10D) section tax exemption also applies to Unit Linked Insurance Plans (ULIPs) returns when the total premium paid is less than Rs. 2.5 Lakhs in a financial year. The maturity proceeds and premature withdrawal received are tax exempted under certain terms and conditions. 

What is the Section 10 (10D) Example?

Say, Mr Bansal invests in life insurance plan(s) and nominates his son as the nominee.

Section 10 (10D) of Income Tax Act, 1961

Individuals choose to invest their money under various investment schemes and instruments to diversify their income in later years. But when the time comes, and they start receiving benefits, do they need to pay taxes on the benefits received? 

The Government of India introduced Section 10 under the Income Tax Act, 1961 to provide significant relief on the income and benefits earned from various sources. Among various provisions included under Section 10, Section 10 (10D) plays a major role in providing financial relief to policyholders.

Besides considering the tax deductions under Section 80C and 80D for premium payment for life and health insurance policies, you can invest in various types of life insurance plans and ULIPs to gain tax relaxation on the payouts/ benefits you or your beneficiaries receive. 

Further in this article, we discuss what is under Section 10 (10D), its limit, and how it benefits an investor for various life insurance policies benefits.

What is Section 10 (10D)?

Section 10 (10D) of the Income Tax Act, 1961, specifies the taxability under which the lump-sum payment received on various life insurance claims at the time of death, maturity, survival, or surrender are subject to tax-exemption. The exemption also applies to the accrued bonuses. 

Individuals, including salaried or non-salaried individuals, associations, Hindu Undivided Families (HUFs), bodies of persons, trusts, foreign companies, and others, can claim these exemptions. 

What is Section 10 (10D) Limit?

Before the Finance Act 2023 amendment, there was no cap on the amount of annual premium paid in any year during the policy term (except for ULIPs). This meant the total benefits received from the life insurance policy/ policies were fully tax-exempted under Section 10 (10D). 

Through the Finance Act 2023 amendment, CBDT issued the guidelines on tax exemption under Section 10 (10D) for the policies issued on or after April 1, 2023. As per the latest guidelines, the benefits received from the life insurance policies (ULIPs excluded) are withdrawn from the exemption if the total premium payable in any tax year during the policy/ policies tenure is more than Rs. 5 Lakhs (except for the amount received on the death of the policyholder). 

Hence, the income from such non-exempt policies is considered income from other sources and fully taxable. If the policyholder invests in multiple insurance policies, the tax exemption is available only to the policy/ policies where the aggregate premium does not exceed Rs. 5 Lakhs.

Additionally, 10 (10D) section tax exemption also applies to Unit Linked Insurance Plans (ULIPs) returns when the total premium paid is less than Rs. 2.5 Lakhs in a financial year. The maturity proceeds and premature withdrawal received are tax exempted under certain terms and conditions. 

What is the Section 10 (10D) Example?

Say, Mr Bansal invests in life insurance plan(s) and nominates his son as the nominee.

Case I: Policy/ policies are purchased before April 1, 2023, and the aggregate premium is less/ more than Rs. 5 Lakhs

• After certain years, Mr Bansal passed away due to an accident. His life insurer then disbursed the death benefit to his son. Such a payout is considered under an income for his family. Hence, the amount is tax-exempt under Section 10 (10D) of the Income Tax Act, 1961. 
• When Mr Bansal survives the maturity date, the maturity benefits received are fully tax-exempt under Section 10 (10D). 

Case II: Policy/ policies are purchased on or after April 1, 2023, and the aggregate premium is less than Rs. 5 Lakhs

• The death or maturity benefits received under such a case remain fully tax-exempt under Section 10 (10D).

Case III: Policy/ policies are purchased on or after April 1, 2023, and the aggregate premium is more than Rs. 5 Lakhs

• In case of death, the death benefits received under the term life insurance policy are fully tax-exempt under Section 10 (10D), irrespective of the total premium amount payable.
• In case of maturity benefit, Mr Bansal can select high premium paid policy/ policies (aggregate premium limit is Rs. 5 Lakhs). These policy/ policies will be tax-exempted. And the benefits received from the remaining policy/ policies will be taxable. 

Eligibility to Avail Section 10 (10D) Benefits

The following conditions are required to qualify for the tax exemptions under Section 10 (10D) of the Income Tax Act, 1961. 

• An individual can claim an exemption under Section 10 (10D) of the Income Tax Act for the death and maturity benefit received, including the incentives or bonuses. 
• All kinds of claims made under life insurance policies issued before April 1, 2023, are eligible for tax deductions with no maximum limit on the amount of life insurance coverage. 
• Both Indian and international life insurance companies can avail of tax benefits under Section 10 (10D) of the Income Tax Act of 1961. 
• The payouts received under a Keyman Life Insurance Policy are not eligible for the tax exemptions. 
• If a life insurance policy is purchased between April 1, 2003, and March 31, 2012, the yearly premium or monthly payments paid in a given year throughout the policy tenure should be less than 20% of the sum assured. 
• The premium amount limit of the life insurance plans bought on or after April 1, 2012, should be 10% of the sum assured. 
• For the policy purchased on or after April 1, 2013, the life insurance premium in any year during the policy tenure should not exceed 15% of the cash value. 
• For the policy purchased on or after April 1, 2023 (other than ULIPs), the total life insurance premium does not exceed Rs. 5 Lakhs in any year during the policy tenure and is tax-exempt.

Except for the above, the individuals meeting the following criteria are included under the life insurance coverage: 

• Individuals with an ailment or developmental disability are listed under Section 80U of the Income Tax Act, 1961.
• The individual suffering from any specific ailment or disease defined under Section 80DDB. 

What is Section 10(10D)?

   - Section 10(10D) deals with tax exemptions on income received from life insurance policies

Eligibility:

• Individuals, HUFs, BOPs, non-salaried individuals, associations, trusts, foreign companies, and others
• Policies issued on or after April 1, 2003

Premium Limit:

- Policies issued on or after April 1, 2023 (other than ULIPs) are withdrawn from exemption if the aggregate premium exceeds Rs. 5 Lakhs in any year during the policy term (except for the amount received on the death of the person).

What are the Requirements Under Section 10 (10D) for Maturity Returns Benefits?

To gain the tax exemption on the maturity return benefits under Section 10 (10D), the following requirements must be met:

• The benefit must be paid upon the death of the policyholder. 
• No benefits should be obtained for an insurance policy issued under Section 80 DD(3) of the Income Tax Act. 
• The policy should not be the Keyman Insurance Policy. 
• The benefits should not be obtained under a group insurance policy issued by the company for their employees.
• The benefits are not obtained from retirement or annuity payout.
• The insurance policies purchased between April 1, 2003 and March 31, 2012, should have a total annual premium cost of less than 20% of the sum assured. 
• For the policies purchased on or after April 1, 2012, the monthly premium amount should not exceed 10% of the sum assured. 
• The annual insurance rate payment cannot exceed 15% of the insurance policy cover.
• For the policy issued on or after April 1, 2013, the benefits are the same, where the person is covered for life under the following:

1. Meeting the criteria for a serious handicap under Section 80U.
2. Ailments and issues are covered under Section 80 DDB. 

• If the maturity benefit received is not tax exempted under Section 10 (10D), then it will be subject to tax deduction at source (TDS) in accordance with the following provisions:

1. 10% TDS for the maturity value approved (when PAN is provided).
2. 20% TDS for the maturity value approved (when PAN is not provided). 

• For the life insurance policies issued on or after April 1, 2023, the aggregate premium payable in any year during the tenure of the policy/ policies should be less than Rs. 5 Lakhs (excluding the ULIPs and except the amount received on the death of the assured). 

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

The policyholder can avail of tax exemptions under Section 10 (10D) of the Income Tax Act, 1961, if levied with the following conditions:

• The premium paid in a single year for the policies purchased between April 1, 2003 and March 31, 2012, should not exceed 20% of the insurance cover. 
• For the policies purchased on or after April 1, 2012, the annual premium amount should not exceed 10% of the insured amount. 

Exclusions Under Section 10 (10D)

Some insurance claims and payments are considered under the exclusion under Section 10 (10D) of the Income Tax Act, 1961. These include: 

• Any amount received under the Keyman Insurance Policy. 
• The payouts received by the beneficiaries under Section 80 DD (3) or 80 DDA (3) are not exempt under Section 10 (10D). 
• The payouts are not eligible for the tax exemptions under Section 10 (10D) if the premium exceeds 20% of the sum assured for the policies purchased between April 1, 2003 and March 31, 2012. 
• If the premiums exceed 10% of the sum assured during any year throughout the policy term where the policy is purchased after April 1, 2012, no tax exemptions are allowed under Section 10 (10D). 
• For the policies purchased on or after April 1, 2023, the tax exemption is withdrawn if the aggregate premium payable in any policy year during the term of such policy/ policies exceeds Rs. 5 Lakhs (except the benefits are received on the death of the person). 

What is TDS for Life Insurance Policies?

The tax deduction at source (TDS) for life insurance policies is applicable under the following conditions:

• Any income amount received from the payment made towards the life insurance policy is liable for 5% TDS if the amount is more than Rs. 1 Lakh in a financial year. 
• The receiver gets the maturity amount after deducting 5% TDS only if the maturity amount exceeds Rs. 1 Lakh. 
• If the payee doesn’t submit the PAN, then the rate of TDS deduction becomes 20%. 
• Additionally, the TDS is also deducted from the bonus amount received. 
• Any sum received as maturity benefit, surrender value, and death benefit (including the bonuses) is exempted under Section 10 (10D) and is not liable for TDS. 
• For any amount less than Rs. 1 Lakh, TDS is applicable. However, you can claim for TDS while filing an ITR.

Tax Liability Under Section 10 (10D) for Single Premium Policy

The maturity amount received under a one-time premium insurance policy isn’t eligible for tax exemption under Section 10 (10D). However, if the minimum sum assured is ten times the premium payable to the policy, the maturity amount received is tax-free. 

What are the Tax Exemptions Under Section 10 (10D) for ULIP Plans?

With the Financial Bill 2021, the tax exemptions under Section 10 (10D) for ULIPs were amended. Section 10 (10D) allows the tax exemptions for unit-linked insurance policies (ULIPs) in the following manner:

• The amendments are effective for the ULIPs purchased on or after February 1, 2021. 
• For the ULIPs purchased after February 1, 2021, exceeding an aggregate annual premium of Rs. 2.5 Lakhs are excluded to gain benefits under Section 10 (10D). 
• The fifth provision specifies that if a single individual pays the premium for multiple ULIPs, they can apply for tax deductions only if the collective annual premium limit is Rs. 2.5 Lakhs.
• ULIPs that do not qualify for exemptions remain the same except for the death claims. 
• The calculated premium includes top-up premiums, riders, GST, and rider loading. 
• As per the amendments, the ULIP plans will be categorized as capital gains, and all the maturity gains, surrender value, or partial withdrawals are taxed as capital gains only. 
• Despite the premium threshold, the applicable death benefits remain tax-exempted. 
• Existing policies are eligible for tax exemption except for the specified scenario outlined in the amendments. 

Final Words

An insurance policy covers you and your family from unforeseen events in life and allows you to enjoy the tax benefits on the annual premium and the benefits received. The policyholder can avail of tax advantages under Section 80C and Section 10 (10D) of the Income Tax Act, 1961. 

As per the latest Finance Act, 2023, if the aggregate premium payable exceeds Rs. 5 Lakhs for the policies issued on or after April 1, 2023, the life insurance policies are eliminated from the exemption (excluding the amount received on the death of the insured person). 

We suggest you understand the policy terms and exemptions before applying for the exemption or take assistance from a tax and investment advisor. 

* Disclaimer: The information provided here regarding insurance products, companies, and other schemes is for general informational purposes only and is subject to change according to the specific terms without prior notice.