Section 10(10D) of the Income Tax Act, 1961, provides tax exemption on the sum received under a life insurance policy, including the bonus. This section ensures that the proceeds from life insurance policies are generally tax-free, subject to certain conditions.
Scope of Exemption:
- The entire sum received under a life insurance policy (including the bonus) is fully exempt from tax.
- This applies to both death benefits (received by the nominee/legal heir) and maturity benefits (received by the policyholder).
Conditions for Exemption:
- The exemption is available only if the premiums paid for the policy do not exceed 10% of the sum assured for policies issued on or after April 1, 2012.
- For policies issued before April 1, 2012, there is no restriction on the premium amount, and the entire sum received is exempt.
Exemption for ULIPs (Unit Linked Insurance Plans):
Proceeds from ULIPs are also exempt under Section 10(10D), provided the premium does not exceed 10% of the sum assured (for policies issued on or after April 1, 2012).
Exemption for Keyman Insurance Policies:
Proceeds from keyman insurance policies are not exempt under Section 10(10D) and are taxable as income.
Exemption for Policies with High Premiums:
If the premium paid for a policy (issued on or after April 1, 2012) exceeds 10% of the sum assured, the maturity or surrender proceeds are taxable in the hands of the policyholder.
Taxability of Life Insurance Proceeds:
| Policy Type | Policy Issued Before April 1, 2012 | Policy Issued On or After April 1, 2012 |
| Premium ≤ 10% of Sum Assured | Fully exempt | Fully exempt |
| Premium > 10% of Sum Assured | Fully exempt | Taxable (except death benefits) |
Taxability of Death Benefits:
Death benefits received under a life insurance policy are always exempt from tax, regardless of the premium amount or the date of issuance of the policy.
Examples of Taxability:
Case 1: Policy Issued Before April 1, 2012
- Sum assured: ₹10,00,000
- Premium paid: ₹2,00,000 (20% of sum assured)
- Maturity proceeds: ₹15,00,000 (including bonus)
- Taxability: Fully exemptunder Section 10(10D).
Case 2: Policy Issued On or After April 1, 2012 (Premium ≤ 10% of Sum Assured)
- Sum assured: ₹10,00,000
- Premium paid: ₹1,00,000 (10% of sum assured)
- Maturity proceeds: ₹12,00,000 (including bonus)
- Taxability: Fully exemptunder Section 10(10D).
Case 3: Policy Issued On or After April 1, 2012 (Premium > 10% of Sum Assured)
- Sum assured: ₹10,00,000
- Premium paid: ₹1,50,000 (15% of sum assured)
- Maturity proceeds: ₹13,00,000 (including bonus)
- Taxability: Taxable(except death benefits).
Notes:1. Surrender of Policy: o If a policy is surrendered before maturity, the surrender value received is exempt only if the premium paid does not exceed 10% of the sum assured (for policies issued on or after April 1, 2012). 2. Tax Deducted at Source (TDS): o No TDS is deducted on the proceeds of a life insurance policy if the amount is exempt under Section 10(10D). 3. Reporting in ITR: o Even though the proceeds are exempt, the policyholder must disclose the amount received under a life insurance policy in their Income Tax Return (ITR). 4. Keyman Insurance Policies: o Proceeds from keyman insurance policies are not exempt under Section 10(10D) and are taxable as income. |
