Introduction: Life insurance policies provide financial security, but understanding the tax implications at maturity is crucial. Section 10(10D) of the Income Tax Act, 1961 outlines exemptions for amounts received under life insurance policies. Let’s delve into the details to demystify the tax landscape.

Section 10 of the Income Tax Act, 1961 speaks about Income which do not form part of total income. In other words, wholly exempt income or exclusions from total income. Under section 10 there are many subsections, section 10(1) to 10(50).

Section 10(10D) of the Act, read as under:

Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than-

On and from 1st October, 1996, amount received under Key man Insurance Policy

As per amendment made by Finance Bill 2003, i.e. assessment year 2004-05, any life insurance policy issue after 1st April, 2003, whose annual premium is in excess of 20% of the Actual Capital Sum Assured.

Say for example, Mr. A has taken a Life Insurance Policy of Rs. 10,00,000 and pay the premium of Rs. 2,10,000 every year. Here Mr. A will not get benefit of section 10(10D). This provision is applicable to the policies issue before 31st March, 2012.

On and from 1st April, 2012, any life insurance policy issued and premium paid on this policy is in excess of 10% of 10% of the Actual Capital Sum Assured, instead of 20%

Life insurance policy premium paid on or after 1st April, 2013, on life of any person, who is a person with disability, or a person with severe disability as refer to in section 80U, or suffering from disease aliment as specified in the Income Tax Rule 11DD made u/s 80DDB any sum received under said insurance policy issued on or after 1st April, 2013 in respect of which premium is payable for any of the years during the term of he policy exceeds 15% of actual capital sum assured. However in respect of policy referred above, any sum received on the death of person is exempt.

Amount Received at the Time of Maturity of Life Insurance Policy is Exempt

Provision of Section 10DD will not apply with respect to any unit linked insurance policy, issued on or after 1st February, 2021, if the amount of premium payable for any of the previous year during the term of the policy exceeds Rs. 2,50,000.

If the premium is payable for more than one unit linked insurance policies, issued on or after 1st February, 2021, provisions of section 10(10D), will apply only with respect of such policies, where the aggregate amount of premium does not exceed Rs. 2,50,000 in any of the previous year during the term of any of those policies.

The Board vide its circular no 2, dated 19th January, 2022, have presented guideline under section 10(10D) in relation to Unit Linked Insurance Policy. Board with the previous approval of the Central Government, is empowered to issue guidelines for removing any difficulty in effect to the provisions of section 10(10D) and such guidelines are required to be laid before each House of Parliament and will be binding on the income tax authorities and the assesse. For the definition of the term ‘unit linked insurance policy’ refer Explanation 3 to section 10(10D).

Due to the above provisions, assesse should be care full for selection of Life Insurance Policy, for single premium policy or for less than 10 years policies.

Date of Policy received Premium amount on the base Policy Amount Amount of during life Amount received after death
Before 31/03/2003 Any amount Tax free Tax free
From  01/04/2003 20% or less Tax free Tax free
Up to 31/03/2012 20% or more Tax free Tax free
From 01/04/2012* 10% or less Tax free Tax free
10% or more Taxable Tax free

*After 1st April, 2013 premium amount, for a any person, who is a person with disability or person with severe disability as refer to in section 80U, or suffering from disease or a ailment as specified in the Income Tax Rule 11DD made u/s 80DDB, the amount of premium 15% instead of 10%.

High Net worth Individual (HNIs), to take benefit of tax exemption, pay high value premium to control them, finance bill 2023 made an amendment in section 10(10D). Any policy issued on or after 1st April, 2023, payment of one or more policies premium during any financial year exceed Rs. 5,00,000, under section 10(10D), benefit is available to the extent of Rs. 5,00,000. Of course there will be no problem, if policy holder expired.

Provision of TDS u/s 194DA applicable:

As per amendment made by Finance Bill 2014, with effect from 1st October, 2014, any policy which is not exempt u/s 10(10D), on payment of that policy tax is to be deducted while making payment @ 2%. To avoid the difficulties to small tax payers, no TDS is to be made if, amount of payment is less than Rs. 1,00,000

Amendment made from 1st June, 2015, if taxpayer submit Form No 15G/15H, no tax is to be deducted.

Conclusion: Selecting a life insurance policy involves careful consideration of Section 10(10D) provisions. The exemption status depends on factors such as premium amounts, policy issuance date, and recent amendments. Stay informed to make tax-efficient choices and ensure financial peace of mind in the long run. Remember, tax laws can change, so periodic updates are essential for a well-informed financial strategy.

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February 2024