What is section 10 (10D)

Section 10(10D) of Income Tax Act - Benefits & Conditions

Life insurance is important and this aspect is quite well understood. It acts as a financial safety net for your family so that in the event of the unfortunate demise of the policyholder, his/her family’s financial future is secured. Besides acting as a safety net, life insurance also helps in tax planning to save money through income tax deductions.

Of course, any money earned falls under the ambit of ‘income’. So, individuals are expected to pay income tax on insurance benefits. However, certain provisions under the Income Tax Act, 1961, exempt policyholders from income tax on life insurance proceeds. Here, Section 10 (10D) comes into play. Read ahead to know what is Section 10 of the Income Tax Act, how the act works along with eligibility criteria, specific terms, and conditions, etc.

How does Section 10(10D) work?

According to Section 10 (10D) of the Income Tax Act, 1961, any amount received under a life insurance policy, including a bonus, is exempt from tax. This section may also cover additional benefits covered under the insurance policy, e.g., death or maturity benefit. Moreover, if you have opted for a Unit Linked Insurance Policy (ULIP), the returns gained on it will also be covered under this policy.

Even the accrued bonus earned on a particular life insurance policy will be exempted under this section. Most importantly, Section 10 (10D) applies to all life insurance policies.

In theory, this section sounds enticing, particularly from the tax-saving perspective. However, let us use a hypothetical situation to understand the practical benefits of Section 10 (10D). Let’s assume that you have availed of a term life insurance policy and nominated your spouse as the beneficiary. Under the unfortunate circumstance of your passing, the specific death benefit chosen during policy purchase will be offered to the nominated beneficiary.

Although your spouse has earned the death benefit, technically, it cannot be considered as ‘income’. This consideration is supported by Section 10 (10D) of the Income Tax act. If the act does not consider your benefit as income, it will be exempted while calculating your spouse’s income for taxation. Thus, the beneficiary need not worry about paying taxes on death benefits.

Considering the above example, Section 10 (10D) sounds pretty straightforward. However, there are certain terms and conditions that you will need to keep in mind.

Terms and Conditions of Section 10(10D)

Each section of the Income Tax Act comes with terms and conditions and Section 10 (10D) is no exception.

To begin with, the premium amount on your life insurance policy must not exceed 10 percent of the assured sum. This clause is applicable for all insurance plans bought after April 01, 2012. In case the premium amount is more than 10% of the sum assured, then the maturity proceeds will be taxed depending on your income bracket and slab.

In the case of plans purchased between April 01, 2003 and March 31, 2012, the premium availed should not exceed 20 percent of the assured sum. If this clause is not met, you will not be able to avail of tax exemption under Section 10 (10D).

Similarly, the premium amount should not be more than 15 percent of the assured sum for plans bought on or before April 01, 2013. This clause applies to two categories of individuals mentioned below -

1. Individuals with disability/severe disability as defined under Section 80U of the Income Tax Act
2. Individuals suffering from specific ailments mentioned under Section 80DDB of the Income Tax Act

As mentioned earlier, this section is applicable for any amount paid out under the insurance policy that you have purchased. This amount may be a death benefit, maturity benefit, or bonus. Even accrued bonuses on ULIP or Single Premium Life Insurance Policy are eligible for exemption, provided they meet the terms mentioned above. So, these payouts should not be deemed as ‘income’ while filing your taxes.

It is also important to note that individuals insured under the Keyman Insurance Policy are not eligible for this exemption.

(In the Keyman Insurance policy, the employer proposes and pays the premium for the policy to insure the life of an employee. Any benefits received will go to the employer. Such policies are availed to compensate for the monetary loss, in case of the unfortunate demise of an employee.)

Eligibility Criteria for Section 10(10D) of the Income Tax Act

In addition to terms and conditions, you also need to fulfill certain eligibility criteria to receive tax exemption under Section 10 (10 D) of the Income Tax Act, 1961.

To begin with, tax exemptions under this section are applicable for all life insurance payouts, including maturity benefits, death benefits, and accrued bonuses. It is also applicable for all claim payouts under your insurance policy (under the conditions mentioned above).

The insurance payout should not fall under the Keyman Insurance Policy or group insurance scheme (GIS) sponsored by your employer. Such a payout must also not be connected to an annuity or pension scheme.

The Finance Act, 2021 introduced provisions to tax gains on proceeds from Unit Linked Insurance Policy (‘ULIPs’) issued on or after 1 February 2021 having aggregate annual premium exceeding INR 2,50,000 in any of the financial year during the term of any of those ULIPs. Such ULIPs shall be considered as capital asset and shall be subject to capital gains on maturity / redemption / surrender. etc. However, the sum received under a ULIP on the death of a person will be exempt under S. 10(10D) of the Act without any restrictions.

The provision is only applicable to policies issued on or after 1st February, 2021 and there will be no changes in taxability of policies issued before the said date.

Additionally, the Finance Act, 2023 proposed that the exemption u/s. 10(10D) will not be available with respect to any other life insurance policy (other than ULIP) issued on or after April 1, 2023 if the amount of premium payable for any previous year during the term of the policy or such policies in aggregate exceeds Rs. 5 lakhs. However, the sum received under a life insurance policy (other than ULIP) on the death of a person will be exempt under S. 10(10D) of the Act without any restrictions.

The provision is only applicable to policies issued on or after 1st April, 2023 and there will be no changes in taxability of the policies issued before the said date.

Finally, the deductions applied under this section apply to both Indian and overseas insurance companies. So, if you avail of an insurance policy from the Indian branch of a foreign insurance company, you can still enjoy the tax benefits. However, the insurance policy must be recognized in India.

In case you’re unable to fulfill the above-mentioned conditions, the insurance payout you receive will be subjected to tax deduction at source (TDS). This amount is calculated based on the following rules -

1. If the permanent account number (PAN) is submitted and policy holder is resident, Tax Deducted at Source (TDS) of 5 percent will be deducted from the total maturity amount.
2. If the permanent account number (PAN) is submitted or not submitted and policy holder is non-resident, Tax Deducted at Source (TDS) of 30 percent (plus surcharge and cess as applicable) will be deducted from the total maturity amount.
3. If the PAN number is not submitted and policy holder is resident, 20 percent TDS will be deducted from the total maturity amount.
4. Further, for individual policy holders, PAN-Aadhaar status to be checked before any pay-outs as it has TDS consequences if not linked.
5. Additionally, if the policy holders has not filed their Income Tax Returns for preceding financial year, there is an additional TDS consequences for the same.

While creating a safety net for your family is a top priority, tax benefits are another reason why people opt for a life insurance policy under Section 10 (10D) of the Income Tax act.

Important note about Section 10(10D) of the Income Tax Act

It is also important to remember that no TDS will be levied on net income benefits worth less than Rs. 1 lakh. However, a value of more than Rs. 1 lakh will be charged with a TDS, as per the terms mentioned above.

Although tax exemption or maturity benefits are reasons enough to purchase a life insurance policy, you should also consider other aspects such as exclusions, eligibility criteria, features, terms, and conditions, etc.