Section 10(10D) of the Income Tax Act: Exemptions & Example

Section 10 (10d) of the Income Tax Act

Life insurance policies are mostly known for providing a financial cushion during medical emergencies. But there are dual benefits of buying a life insurance policy i.e., you can also enjoy tax benefits and exemptions. For instance, as per Section 10(10D) of the Income Tax Act, any claim amount or bonus (if any) received will be completely tax-free irrespective of whether the amount is paid out upon the death of the insured, surrendering the policy or maturity of the policy.

Let’s understand Section 10(10D) with an example.

Section 10 (10d) Example

Let’s say Mr. Agarwal bought a term insurance plan and nominated his son as a beneficiary. Unfortunately, Mr. Agarwal died in a road accident, and his insurer disbursed the death benefit to his son (nominee). Such a payout may seem like an income. However, Section 10(10D) ensures that this amount is not taxed.

Analyzing Exemptions Under Section 10 (10d)

1. Tax Rebate on Life Insurance Policy

• You can claim tax exemptions under Section 10(10D) of the Income Tax Act provided your policy premium payments in a single year doesn’t exceed 20% of the sum assured (applicable for policy purchased between 1 April 2003 and 31 March 2012)
• If the life insurance policy is purchased after 1 April 2012, note that the policy premium for a single year shouldn’t exceed 10% of the assured sum. 
• Premium payment during any single year shouldn’t exceed 15% of the assured amount if the policyholder is disabled or has been suffering from diseases.
• The type of diseases that belong to this category (check 3rd pointer) is mentioned under Section 80U of the Income Tax Act.
• Diseases considered under the tax exemption should be specified under Section 80DDB of the Income Tax Act.

2. Tax Liability of Single Premium Policies

Maturity amount received via a one-term premium insurance plan isn’t exempt from tax under Section 10(10D). The amount could be tax-free only if the minimum sum assured is 10x the single premium amount paid.

3. TDS on Life Insurance Policy

For policies that don’t come under Section 10(10D), any amount you receive from the insurance policy that exceeds ₹1 lakh, 1% TDS would be deducted by the insurance company before the payout. If the amount is below ₹1 lakh, no TDS would be deducted. Though the amount would be taxable, you can claim a refund against TDS deducted at the time of filing Income Tax Returns.

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Eligibility Under Section 10 (10d)

Here are the primary provisions under Section 10(10D) of Income Tax Act, 1961:

• Tax exemptions are applicable for payouts from life insurance claims. Such payouts can include maturity benefits, death benefits, and accrued bonuses. 
• The payout shouldn’t be available under the Keyman Insurance Policy.
• It shouldn’t be an annuity or pension plan payout.
• The payout received isn’t a part of any group insurance or employer provided insurance scheme.

Maturity Return Requirements Under Section 10 (10d) of Income Tax Act

Maturity payouts must satisfy the following conditions for individuals to avail tax benefits under this Section:

• The payout should be due to death benefit.
• The payment isn’t for policies issued under Section 80DD(3) of the IT Act.
• This payment must not be applicable under Keyman Insurance Policy.
• It should not be a pension or an annuity plan payment.
• Payout is not from a company-sponsored GIS (group insurance scheme) 
• The premium payable for any year should not go above 20% of the sum assured for an insurance policy bought between April 1  2003 and April 30, 2012  
• In case the insurance policy is bought post-April 30, 2012, your amount of premium must not exceed 10% of the sum assured. 
• The premium amount for any year must not go beyond 15% of the sum assured for the insurance policy. The policy should be bought on or post April 1, 2013; It should be for the following individuals:
  • A person having a severe disability or a disability according to Section 80U
  • An individual with an ailment or a disease as per Section 80DDB 
  • In case your policy’s maturity benefit is not eligible for exemption under Section 10(10D), then there will be a TDS exemption on the amount according to the following terms:

• In case you haven’t submitted your PAN, then TDS @20% is applicable on the payout.
• In case you have submitted your PAN, then TDS @10% applies to your maturity amount. 

Budget 2021 Amendment for Section 10 (10d)

In Budget 2021, a key amendment was introduced under the 4th proviso to Section 10(10D). This amendment was pertaining to ULIPs (Unit Linked Insurance Plans) with a substantially high annual premium amount. As per the amendment, exemption under Section 10(10D) is not applicable to ULIPs issued on or after 1 February 2021, where the annual premium payment is more than ₹2.5 lakh in any year during the course of the policy.

A 5th proviso was also introduced that addressed individuals paying premiums of multiple ULIPs. In such a case, the annual premium payment limit of ₹2.5 lakhs could be applicable. However, these exclusions are not applicable if the ULIP payouts are received as a death benefit.

Final Word

Needless to say, many people have used insurance policies as tax-saving tools over the years. The primary aim of Section 10(10D) of the Income Tax Act is to encourage people to purchase life insurance policies for protecting their loved ones. However, you must understand the policy terms and exceptions before taking the plunge.

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