Section 10(10D) of Income Tax Act

Table of Content

1. What types of life insurance policy proceeds are exempt under Section 10(10D)?

2. What are the key eligibility conditions under Section 10(10D)?

3. How does Section 10(10D) work in practice?

4. What happens if the exemption under Section 10(10D) does not apply?

5. Recent Amendments and What They Mean for You

6. How to Ensure Your Life Insurance Policy Qualifies Under Section 10(10D)?

7. Conclusion

8. FAQs on Section 10(10D) of Income Tax Act

Section 10(10D) of the Income Tax Act, 1961 provides tax exemption on the proceeds you receive from a life insurance policy. This includes bonuses, death benefits, maturity benefits, and some surrender values. But the exemption only works if your policy meets certain requirements, the most important of which is that the annual premium cannot be more than a certain percentage of the sum assured.

Recent changes have also set limits on the premiums for different types of policies. If you buy ULIPs on or after February 1, 2021, you will not have to pay taxes on them if the total annual premium for all of them is less than ₹2.5 lakh and the total annual aggregate turnover is less than 10% of the sum-assured. The maximum yearly premium for non-linked policies that are issued on or after April 1, 2023, is ₹5 lakh.

Overall, Section 10(10D) helps policyholders get their insurance payouts without paying taxes. This makes life insurance a better way to plan for the long term.

What types of life insurance policy proceeds are exempt under Section 10(10D)?

Under Section 10(10D) of the Income Tax Act, 1961 several types of payouts received from a life insurance policy are exempt from tax, provided the policy meets the specified premium-to-sum-assured conditions. These tax-free proceeds can include maturity benefits, death benefits, surrender values, and bonuses.

• Maturity Proceeds

Maturity payouts, along with any attached bonuses, are exempt from tax if the annual premium does not exceed the permitted percentage of the sum assured. For policies issued on or after April 1, 2012, this limit is 10% of the sum assured. If this condition is not met, the maturity amount may become taxable.For ULIP policies issued after 1^stFebruary 2021 the maturity amount may be exempt if the premium does not exceed 10% of the sum-assured and the total aggregate premium for all policies does not exceed ₹2.5 lakh in a financial year. If these conditions are not met then the maturity amount becomes taxable under the head “Income from Capital Gains”.The maximum yearly premium for non-linked policies that are issued on or after April 1, 2023, is ₹5 lakh.

• Surrender Value

Surrender value, received when you terminate the policy early, also becomes eligible for tax exemption only if the policy satisfies the same premium-to-sum-assured rules Such exemption is available subject to compliance with the conditions prescribed under Section 10(10D) of the Income Tax Act, 1961.

• Death Benefits

Any sum received on the death of the insured is exempt under Explanation 1 to Section 10(10D), irrespective of premium limits and the ratio of premium to sum assured. This ensures complete financial protection for your family during difficult times.

• Applicable Policy Types

Tax exemption under Section 10(10D) can apply to term insurance, endowment plans, ULIPs (Unit Linked Insurance Plans), and whole life policies, provided they meet the criteria. If you purchased a ULIP plan after February 1, 2021, it will be tax-free only if the yearly premium is not more than ₹2.5 lakh and the premium does not exceed 10% of the sum-assured.

If you are wondering what is ULIP, it is a life insurance plan that combines protection with market-linked investment returns.

• Exclusions

Exemption under Section 10(10D) shall not apply to any sum received under a Keyman Insurance Policy, as excluded under Explanation 2 to Section 10(10D) of the Income Tax Act, 1961.and certain employer-employee plans. These are discussed in detail later in the article.

What are the key eligibility conditions under Section 10(10D)?

Section 10(10D) of the Income Tax Act, 1961, is to grant you tax exemption on your life insurance payouts. However, all these come with certain conditions related to premiums and the issue date. These are the conditions you should follow:

Premium to Sum Assured Ratio

Your exemption eligibility largely depends on the date the policy was issued, as different rules apply for different periods:

• Policies issued between 1 April 2003 and 31 March 2012:

Annual premium must not exceed 20% of the sum assured

• Policies issued on or after 1 April 2012:

Annual premium must not exceed 10% of the sum assured

• Policies issued on or after 1 April 2013 for persons with disability or specified ailments:

For persons referred to in Section 80U or Section 80DDB i.e persons with disability or specified ailments, the premium limit is 15% of sum assured instead of 10%. This provision ensures fair access to insurance and tax benefits for individuals with higher risk profiles.

These issue dates are crucial because even a slight change in policy start date can shift your applicable premium limit and affect tax-exemption eligibility.

Recent Amendments Addressing ULIPs and Non-Linked Policies

Recent tax amendments were introduced to promote fairness and prevent the use of high-premium policies solely for investment-driven, tax-free returns.

• ULIPs (Unit Linked Insurance Plans) issued on or after 1 February 2021:

Exemption shall not apply where aggregate premium exceeds ₹2.5 lakh per yearor the total premium is exceeding 10% of the sum assured.In order to avail the exemption both the conditions shall be fulfilled.

• Non-linked life insurance policies issued on or after 1 April 2023:

Exemption shall not apply where aggregate premium exceeds ₹5 lakhin a financial year or the total premium is exceeding 10% of the sum assured.In order to avail the exemption both the conditions shall be fulfilled.

These caps ensure that tax exemptions are aligned with the true purpose of life insurance, financial protection, not as a loophole for tax-free investment accumulation.

Death Benefit Exception

Importantly, the death benefit payable under any life insurance policy is exempt from tax regardless of the premium-to-sum assured ratio or premium caps. This ensures full tax protection for beneficiaries upon the policyholder’s death.

Eligibility for Residents and Non-Residents

Both resident Indians and Non-Resident Indians (NRIs) can avail the exemption under Section 10(10D) if they meet the above conditions.

All these conditions aim to curb the misuse of insurance for tax avoidance and also encourage genuine risk protection and savings through life insurance.

How does Section 10(10D) work in practice?

Still confused if your life insurance plan is tax-exempt under Section 10(10D)? Look at the table below to understand some examples:

What happens if the exemption under Section 10(10D) does not apply?

If the premium exceeds the allowed limits or aggregate caps as mentioned under Section 10(10D), the payout, including maturity, surrender value, or bonuses, becomes taxable. You have to pay taxes at your income tax slab on the net gain (payouts less premiums paid) as “Income from Capital Gains” for ULIP policies and as “Income from Other Sources” for Non-ULIP policies.

• Taxable Amount Calculation

The taxable portion is calculated as the total payout received minus the total premiums paid over the policy term.

For example, if the maturity payout is ₹10 lakh and total premiums paid were ₹7 lakh, the ₹3 lakh difference will be your taxable income.

• TDS Deduction

Insurance companies deduct TDS under Section 194DA at 2% on this taxable income if the payout exceeds ₹1 lakh in a financial year.

Suppose you have a life insurance policy that does not qualify for exemption under Section 10(10D) of the Income Tax Act, 1961 and it matures in June 2025. You receive a total payout of ₹8 lakh, and over the policy term, you have paid ₹5.5 lakh in premiums. The taxable portion of the payout is ₹2.5 lakh (₹8 lakh - ₹5.5 lakh).

Under Section 194DA, TDS is charged at 2% on this amount. The insurer will deduct ₹5000 (2% of ₹2.5 lakh) as TDS and pay you the remaining ₹2.45 lakh as the net taxable income component.

This TDS applies only to maturity or surrender proceeds. Death benefits remain fully tax-exempt regardless of compliance with other conditions.

Tips to Avoid Tax Liability

• Review Policy Documents Early: You can verify issue dates, premium-to-sum assured ratios, and aggregate premiums across all policies before maturity or surrender.

• Consider Restructuring: You may switch to compliant policies or explore partial withdrawal options, if possible, to stay within prescribed limits.

• Consult a Tax Advisor or Insurer: You can contact tax advisors for easier planning. If eligible, you can submit Form 15G/15H to avoid TDS deduction.

Non-compliance can lead to unexpected tax liabilities during ITR filing, but proactive checks and planning ensure that eligible policy proceeds remain tax-free.

Recent Amendments and What They Mean for You

Recent changes under Section 10(10D) were introduced to ensure that tax exemptions on life insurance remain aligned with the true purpose of insurance, financial protection, not tax-free investment. These amendments have a direct impact on policyholders, especially those holding multiple policies or high annual premiums.

Key Amendments You Should Know

Though described earlier, these are some key amendments you must know:

• ULIP Premium Cap: For Unit Linked Insurance Plans (ULIPs) issued on or after 1 February 2021, tax exemption under Section 10(10D) is available only if the total annual premium across all ULIPs does not exceed ₹2.5 lakh and the premium does not exceed 10% of the sum-assured.

• Non-Linked Policy Premium Cap: For traditional (non-linked) life insurance policies issued on or after 1 April 2023, the exemption applies only if the aggregate annual premium across all such policies is ₹5 lakh or lessand the premium does not exceed 10% of the sum-assured.

For example, buying two non-linked policies after April 2023 with premiums of ₹3 lakh each totals ₹6 lakh, exceeding the ₹5 lakh cap and making the proceeds taxable.

Why Did These Changes Happen?

The government noticed that some high-net-worth individuals were using large-premium insurance policies as tax-free investment vehicles rather than for protection. This led to disproportionately high tax-free returns. The amendments were introduced to:

• Improve tax fairness

• Prevent misuse of insurance for aggressive tax planning

• Ensure life insurance remains focused on risk protection and long-term financial security

Impact on People Holding Multiple Policies

If you own more than one ULIP or multiple traditional policies:

• Your aggregate annual premium will be checked, not just individual policy premiums.

• Even if each policy individually meets the premium-to-sum-assured ratio, exceeding the overall premium cap willallow only one policy to avail exemption that meets the conditions stipulated.

• You may have to evaluate whether to continue, restructure, or consolidate policies to stay within limits.

If you are looking for personal guidance to understand Section 10(10D), you can contact us for help. At HDFC Life, we have advisors to tell you everything before buying a new life insurance policy. So, contact us now!

How to Ensure Your Life Insurance Policy Qualifies Under Section 10(10D)?

To make sure your life insurance payouts remain tax-exempt under Section 10(10D), you must regularly review your policy details and premium limits. By following this checklist, you can secure and maintain the tax exemption under Section 10(10D) and avoid unexpected tax liabilities.

1. Policy Issue Date & Plan Type

For policies issued after April 1, 2012, make sure the annual premium does not exceed 10% of the sum assured (20% for policies issued between April 1, 2003, and March 31, 2012).For ULIP policies issued after 1^st February 2021 the maturity amount may be exempt if the premium does not exceed 10% of the sum-assured and the total aggregate premium for all policies does not exceed ₹2.5 lakh in a financial year. For traditional (non-linked) life insurance policies issued on or after 1 April 2023, the exemption applies only if the aggregate annual premium across all such policies is ₹5 lakh or less and the premium does not exceed 10% of the sum-assured.

2. Exclusions

Verify that your policy is not a keyman insurance or a employer-employee policy, as these are not eligible for exemption under Section 10(10D) of the Income Tax Act, 1961.

3. Premium vs. Sum Assured

Check each year that your premium does not exceed the prescribed percentage of the sum assured. For multiple policies, calculate the aggregate premium and ensure it remains within the allowed limits for each policy.

4. Documentation & Nomination

Keep all policy documents, premium receipts, and nomination details safe. Proper documentation is essential for smooth claim settlement and tax exemption verification.

5. Tax-Exemption Status Review

If you have an advisor, you may ask to conduct a “tax-exemption status review” before policy renewal or maturity to confirm ongoing eligibility.

6. Align Policy Decisions with Tax Planning

Whether you follow the old or the new tax regime, ensure your policy purchase and premium commitments align with your broader tax-saving strategy.

Regular reviews at key milestones, such as renewal, maturity, or surrender, ensure your policy continues to qualify for tax-free benefits under Section 10(10D) of the Income Tax Act, 1961.

Conclusion

To maximise tax benefits under Section 10(10D)of the Income Tax Act, 1961, ensure your policy meets eligibility criteria, premiums are within prescribed limits, and you paid premiums on time.

Secure your family’s future with confidence. Choose an HDFC Life insurance policy today to enjoy long-term financial protection, hassle-free claims, and valuable tax benefits under Section 10(10D).

Make a smart move now, invest in reliable coverage that grows with your needs.

FAQs on Section 10(10D) of Income Tax Act

1. What is Section 10 10D in income tax?

Section 10(10D) of the Income Tax Act, 1961 provides tax exemption on amounts received from a life insurance policy under certain conditions.

2. What types of life insurance proceeds are exempt under Section 10(10D)?

Section 10(10D) of the Income Tax Act provides tax exemption on proceeds received from a life insurance policy, such as death benefits, maturity proceeds, and bonuses.

3. How do recent amendments affect Section 10(10D) tax exemption?

Recent amendments limit Section 10(10D) tax exemptions by introducing premium caps. ULIPs issued after February 2021 lose exemption if total premiums exceed ₹2.5 lakh yearly as per Fourth Proviso to Section 10(10D) of the Income Tax Act, 1961, while non-linked policies issued after April 2023 lose exemption if annual premiums cross ₹5 lakh.

4. What is Section 10(10D) of the ULIP?

Section 10(10D) exempts ULIP maturity proceeds from tax, making returns and bonuses tax-free when eligibility conditions are met. Death benefits are always exempt, and no TDS applies to payouts.

5. Is Section 10(10D) available in the new tax regime?

Section 10(10D) exemptions are available in both the old and new tax regimes. This is because the exemption applies to the policy’s payout itself, not to Chapter VI-A deductions. This means you continue to enjoy the exemption even if you opt for the new tax regime.

Note: If assessee has opted for Old tax regime, assessee shall be eligible to claim deduction under chapter VI-A (like Section 80C, 80D, 80CCC, etc). If assessee opted for New tax regime only few deductions under Chapter VI-A such as 80JJAA, 80CCD(2), 80CCH(2) are available.

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