Section 10(10D) of Income Tax Act

What is Section 10(10D) of the Income Tax Act?

Section 10(10D) of the Income Tax Act 1961, deals with the taxability of payments received under life insurance policies. It provides tax exemption on the sum assured and accrued bonuses received under a life insurance policy claim, subject to certain conditions and exclusions.

Additionally, this provision also covers Unit Linked Insurance Plans (ULIPs) with a total premium of less than 2.5 lakhs in a financial year. The tax exemption applies to the proceeds received at maturity or even in the case of premature withdrawal, subject to the conditions and provisions specified in the Income Tax Act.

What are the Exemptions Under Section 10(10D)?

Below are the tax benefits that you can avail under Section 10 (10D) of the Income Tax Act, 1961:

• Premiums paid in a single year between April 1, 2003, and March 31, 2012, should not exceed 20% of the insurance cover to qualify for deductions under Section 10(10D).
• For policies acquired after April 1, 2012, the premium amount should not exceed 10% of the insured total for exemption under Section 10(10D).
• Exemption on life insurance before April 1, 2013, does not exceed 15% of the guaranteed value if the insured is seriously disabled or ill.
• Disabilities qualifying for exemption are listed in Section 80U, including developmental disorders and autism.
• Illnesses covered for exemption under Section 80DDB are listed in the same section.

What are the Tax Exemptions for ULIP Plans Under Section 10(10D)?

• Finance Bill 2021 amended Section 10(10D) tax exemptions for ULIPs.
• Amendments exclude ULIPs bought after February 1, 2021, with an aggregate annual premium exceeding ₹2,50,000.
• ULIPs not qualifying for exemptions maintain their status, except for death claims.
• Premium calculation includes top-up premiums, riders, GST, and rider loading.
• Amended provisions categorize ULIPs as capital assets.
• Maturity, surrender, or partial withdrawal proceeds are subject to taxation as Capital Gains.
• Death benefits, despite the premium threshold, remain entirely tax-exempt.
• The comprehensive premium calculation considers various components, ensuring a thorough approach.
• Amendments are effective for ULIPs purchased on or after February 1, 2021.
• Existing policies maintain tax-exempt status, except for specified scenarios outlined in the amendments.

What are the Maturity Requirements Under Section 10(10D)?

• The benefit amount must be paid upon the death of the policyholder. It does not apply to maturity benefits received while the policyholder is alive.
• The policy should not be a Keyman Insurance Policy, which is a type of insurance that companies take out on their key employees.
• The benefit payout should not be an annuity or retirement payout. These are taxed differently.
• The benefit should not be received for an insurance policy issued under Section 80DD(3) of the Income Tax Act, which deals with insurance for disabled dependents.
• The policy must have been in force for at least two years before the maturity date.
• Additional Requirements for ULIPs (Unit Linked Insurance Plans):
  • Premium Limit for ULIPs issued on or after February 1, 2021: The annual premium for ULIPs issued on or after February 1, 2021, should not exceed Rs. 2.5 lakh in any year during the policy term to be eligible for exemption under Section 10(10D).
• Maturity returns under Section 10(10D) are applicable if benefits are not derived from a company-supplied group insurance policy.
• For plans obtained between April 1, 2003, and March 31, 2012, the annual insurance cost cannot exceed 20% of the sum assured.
• If insurance is obtained after April 1, 2012, the monthly amount should not exceed 10% of the sum assured.
• Annual insurance premium payment should not surpass 15% of the policy's insurance cover. This applies if the coverage is for an individual meeting the criteria under Section 80U or as per Section 80DDB.
• Tax Deducted at Source (TDS):
  • 10% TDS on the entire maturity value if PAN is provided.
  • 20% TDS on the entire sum if PAN is not provided.

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

Section 10(10D) of the Income Tax Act provides tax exemptions on life insurance policy proceeds, subject to certain conditions. To understand its application, let’s look at an example:

Example:
Mr. Khanna purchases a life insurance policy with a sum assured of ₹5 lakh, paying an annual premium of ₹50,000. After five years, he surrenders the policy and receives ₹3 lakh as the surrender value. Since the policy was held for more than two years, this surrender amount is tax-exempt under Section 10(10D).

Key Takeaways:

• Exempt Amount: Proceeds from life insurance policies are exempt under Section 10(10D) if specific conditions, like holding the policy for at least two years, are met.
• Taxable Income: If the policy does not qualify for exemption, calculate your taxable income by subtracting the total premiums paid from the proceeds received.
• Short-Term Policies: Policies held for less than two years result in the entire payout being taxable.

What is the Eligibility Criteria Under Section 10(10D)?

The following conditions are required to qualify for tax exemptions under Section 10(10D) of the Income Tax Act:

• Tax exemptions under Section 10(10D) of the Income Tax Act apply to life insurance policies, including death and maturity benefits, including earned incentives.
• Deductions are applicable to all life insurance claims, with no maximum limit on the coverage amount.
• Both Indian and international life insurance companies are eligible for tax benefits as per Section 10(10D) of the Income Tax Act of 1961.
• Keyman Insurance Policy payouts are not eligible for tax deduction.
• For policies purchased between April 1, 2003, and March 31, 2012, annual premiums cannot exceed 20% of the sum insured.
• Policies bought on or after April 1, 2012, have a premium limit capped at 10% of the sum assured.
• Premiums for life insurance policies purchased on or after April 1, 2013, should not exceed 15% of the cash value in any policy year. The coverage must include individuals meeting the criteria under Section 80U (disabled individuals) and Section 80DDB (individuals with specified ailments).

What are the Exclusions Under Section 10(10D)?

Some of the exclusions under Section 10(10D) are: 

• Any amount received under the Keyman Insurance Policy is not covered under Section 10(10D).
• Payouts to beneficiaries under Section 80DD(3) or 80DDA(3) are not exempted.
• For policies bought between April 1, 2003, and March 31, 2012, if premiums exceed 20% of the sum assured, deductions under Section 10(10D) are not applicable.
• In the case of life insurance plans purchased after April 1, 2012, no deductions are allowed if premiums exceed 10% of the sum assured during any policy year.

Tax on a Single Premium Insurance Plan

Single-premium insurance plans offer a unique way to secure your future with a lump sum payment. Understanding the tax implications of these plans is crucial for maximizing their benefits.

• Taxability of Maturity Proceeds:
  • Maturity proceeds from a single premium policy are generally exempt from income tax under Section 10(10D) of the Income Tax Act.
  • Key Condition: This exemption applies only if the total premium paid does not exceed 10% of the sum assured.
  • If Premium Exceeds 10%: If the premium paid is higher than 10% of the sum assured, only the difference between the maturity proceeds and the premium paid will be taxable.
• Deduction Limit under Section 10(10D):
  • Section 10(10D) provides a tax deduction for claim payouts and bonuses from all types of insurance policies.
  • Importantly, there is no upper limit on the tax deduction under this section as long as the applicable conditions are met.

The Best Ways to Use Section 10(10D)

Section 10(10D) can be a valuable tool for effective financial planning. Here are some key strategies:

• Regularly Monitor Policy Performance:
  • Single premium policies are long-term investments.
  • Regularly review your policy's performance to ensure it aligns with your financial goals.
  • Track factors like cash value, fees, and charges.
  • If the policy's performance falls short of expectations, explore alternative options with your insurer.
• Thoroughly Understand Policy Terms:
  • Carefully review the policy document to understand all terms and conditions, including cash value, fees, charges, interest rates, and penalties for loans or withdrawals.
• Strategic Use of Section 10(10D):
  • Partial withdrawals can be considered for short-term needs like education, weddings, or medical emergencies.
  • Important Note: Partial withdrawals may reduce the death benefit and potentially impact the eligibility for tax exemption under Section 10(10D).
  • Consider maintaining separate term insurance and investment portfolios to address short-term needs while preserving the long-term benefits of the single premium policy.

Key Considerations of Section 10(10D) of the Income Tax Act

Section 10(10D) of the Income Tax Act provides tax exemptions on certain life insurance policies. However, there are specific instances where these exemptions may not be applicable.

1. When Exemptions Are Not Allowed Under Section 10(10D)
   • Excess Premium on Life Insurance Policies: Section 10(10D) generally exempts life insurance policy proceeds from taxation if the premium paid does not exceed 10% of the sum assured. However, if the premium surpasses this limit, the policy proceeds become taxable. This is known as "excess premium" on life insurance policies.
   • High Premium Life Insurance Policies:
     • The Sixth and Seventh provisions introduced in the Finance Bill 2023 further restrict tax exemptions for high-premium policies.
     • Sixth Provision: Life insurance policies with annual premiums exceeding Rs. 5 lakh will generally not be eligible for tax exemptions under Section 10(10D).
     • Seventh Provision: For individuals with multiple life insurance policies, the total annual premium of all policies combined cannot exceed Rs. 5 lakh to qualify for tax exemptions. If the total premium exceeds this limit, only policies with individual premiums below Rs. 5 lakh will be eligible for exemptions.
2. Exemptions Allowed Under Section 10(10D) of the Income Tax Act
   • Death Benefits: Importantly, sub-clauses (c) and (d) of Section 10(10D), as well as the fourth and fifth provisions related to Unit Linked Insurance Plans (ULIPs), do not apply to death benefits received from life insurance policies. This means death benefits are usually completely tax-free.

2021 Budget Update for Section 10(10D) for ULIPs

Budget 2021 introduced a significant amendment to Section 10(10D) affecting Unit Linked Insurance Plans (ULIPs) with high annual premiums. The key amendments are:

• The fourth provision under Section 10(10D) specifies that ULIPs issued on or after February 1, 2021, lose the exemption if the annual premium exceeds Rs. 2.5 lakh in any year during the policy term.
• A fifth provision addresses cases where a single individual pays premiums for multiple ULIPs, applying the Rs. 2.5 lakh annual premium limit collectively.
• According to the Section 10(10D) amendment, policyholders can avail of the exemption only for ULIPs where the aggregate annual premium for all policies is below Rs. 2.5 lakh.
• However, these exclusions to Section 10(10D) exemptions do not apply to ULIP payouts received as a death benefit for the insured person.