Section 10(10D) of the Income Tax Act: Eligibility, Exclusions And More

Income Tax

A life insurance plan offers security to a family after the policyholder’s demise. It provides financial assistance to a family during an emergency. However, money received in the form of insurance benefits is a part of your income and comes under the purview of income tax. 

To reduce the tax burden of Indian citizens, the government has introduced Section 10(10D) of the Income Tax Act which offers tax exemptions on any amount paid out under a life insurance policy. Keep reading to get the details!

How Does Section 10(10D) of the Income Tax Act Work?

As per Section 10(10D), there will be no tax implications for claims originating from life insurance policies. Such claims can include death benefits and accrued bonuses. 

For 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.   

Eligibility Terms and Tax Exemptions under Section 10(10D)  

Here are the primary provisions under Section 10(10D) of the 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. 
• Exemptions are available for payouts from any kind of life insurance claim. 
• There is no exemption limit under this Section.
• Tax benefits are applicable in the case of both Indian and foreign life insurance providers. 
• Foreign companies, body of persons, companies, trusts, associations, HUFs and individuals (non-salaried and salaried) can claim such tax benefits. 

Exclusions for Section 10(10D) 

Certain exceptions to this Section are as follows:

• Any payment under a life insurance policy issued after April 1 2012, wherein the amount of premium in the policy period goes above 10% of the sum assured
• Any payment under a life insurance policy issued prior to March 31, 2012, and on April 1, 2003, where the amount of premium for any fiscal year in the policy period goes beyond 20% of the sum assured 
• Any payouts under Keyman Insurance Policy

Also Read: Deductions Under Chapter 6A Of The Income Tax Act 

TDS for Life Insurance Policies 

In case payment from a life insurance plan is more than Rs. 1 lakh and the insurance policy is not applicable under this Section, then your insurance company will deduct 1% TDS prior to making the payment. This is in force from October 2014. 

Furthermore, your insurer will deduct TDS on bonus payments. If your payment is below Rs. 1 lakh, then there’ll be no TDS exemption. While this payment will be completely taxable, a person may claim credit for tax deducted at source at the time of ITR filing. 

Tax on a Single Premium Insurance Policy 

The maturity amount from a single premium insurance policy is not eligible for Section for exemption under Section 10(10D). However, maturity benefit amounts are not taxable in case the sum assured is 10 times the amount of premium payable for the policy period. 

Requirements for Maturity Payouts under Section 10(10D)     

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

• Death payout should be the 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. 
• 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:

1. A person having a severe disability or a disability according to Section 80U
2. An individual with an ailment or a disease as per Section 80DDB 
3. 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:

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

Important Points to Consider for Section 10(10D) 

Here are the terms and conditions to tax benefit under Section 10(10D):

• For insurance policies purchased after April 1 2012, your premium amount should not go beyond 10% of the sum assured. 
• Payments not applicable for exemptions under Keyman Insurance Policy are eligible under Section 10(10D). 
• The premium payable in any fiscal year for an insurance policy should not exceed 20% of the sum assured for a policy purchased between April 1 2003, and March 31 2012. 
• Section 10(10D) offers tax exemption on payouts received through a life insurance policy’s death benefits, bonus, and maturity. 

Also Read: Section 115 BA Of The Income Tax Act

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. 

Frequently Asked Questions

1. What is the maximum exemption available under Section 10(10D)?

The total payment under a life insurance policy is eligible for tax exemption under Section 10(10D) of the Income Tax Act. This means that the Income Tax Department has not set an upper limit for this tax benefit.  

2. Are there any other tax benefits available for life insurance plans?

Yes, as per Section 80C of the Income Tax Act, 1961, the premium payables for a life insurance plan are eligible for a tax deduction. You can opt for a deduction of up to Rs. 1,50,000 under this section.   

3. Do we need to pay taxes on the life insurance maturity amount?

As per Section 10(10D), the payment made on surrender or maturity of an insurance policy or at the time of a policyholder’s demise will be tax-fee. However, you need to satisfy the following conditions:

• In the case of insurance policies issued prior to April 1 2012, the sum assured will have to be 20 times (minimum) the premium. 
• In the case of insurance policies issued after April 1 2012, the premium amount should not go beyond 10% of the sum assured. 

4. How are life insurance policies beneficial?

Life insurance policies can be helpful to you in the following ways:

• They offer financial assistance to your family
• Such policies can facilitate your child’s higher education in case of your absence
• The payouts can be utilised to pay off debt
• Some annuity-oriented life insurance policies provide regular pensions after maturity
• You can avail tax benefits through these plans. 

5. Is ULIP a type of life insurance policy?

ULIPs (Unit Linked Insurance Plans) merge financial investment with life insurance. These policies offer multiple portfolio strategies and fund options. They have a lock-in period of 5 years. After this period is over, you can withdraw money from this plan regularly.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.