Amount received under a Life Insurance Policy [Section 10(10D)]

Exempted Incomes-Section 10(10D)

Section 10(10D) of the Income Tax Act deals with the tax treatment of the sum assured received from a life insurance policy.

According to Section 10(10D), any amount received under a life insurance policy, including the sum assured, bonus, or any other payment made on the death of the insured, is exempt from tax. This means that the amount received by the nominee or the legal heir of the policyholder is not taxable.

Section 10(10D) of the Income Tax Act, 1961 provides an exemption from income tax for the amount received under a life insurance policy, including the sum assured, bonus, and maturity benefit.

Conditions for Exemption:

However, there are certain conditions that need to be fulfilled for the exemption under Section 10(10D) to apply.

  • The life insurance policy must have been issued by an Indian life insurance company.
  • The premium paid on the policy must not exceed 10% of the sum assured.
  • The policy must have been in force for at least 5 years.
  • The exemption is available to the policyholder and the beneficiary of the policy.
  • There is no upper limit on the amount of exemption that can be claimed under Section 10(10D).
  • The exemption is available for all types of life insurance policies, including term plans, endowment plans, and money-back plans.
  • The exemption is also available for the amount received on surrender of a life insurance policy.

The exemption is available to both the policyholder and the beneficiary. If the policyholder receives the amount on maturity of the policy, the exemption is available to him/her. If the beneficiary receives the amount on the death of the policyholder, the exemption is available to him/her.

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Exceptions to the Exemption U/s 10(10D)

The exemption under Section 10(10D) is not available in the following cases:

(a)        any sum received from a policy under section 80DD (3) or section 80DDA (3); or

(b)        any sum received under a Keyman insurance Policy; or

(c)        any sum received, under an insurance policy issued on or after 1.4.2003 but on or before 31.3.2012 in respect of which the premium payable for any of the years during the terms of the policy exceeds 20% of the actual capital sum assured.

However, such sum received on the death of a person shall he exempt: or

(i)         any sum received, under an insurance policy issued on or after 1.4.2012 in respect of which the premium payable for any of the years during the terms of the policy exceeds 10% of the actual capital sum assured.

However, the above provision of’ sub-clauses (c) and (d) shall not apply to any sum received on the death of a person. [First proviso]

Further, any sum received under an insurance policy issued on or after 01.04.2013 for the insurance on the life of any person who is—

(i)         a person with disability or a person with severe disability as referred to in section 80U, or

(ii)        suffering from disease or ailment as specified in the rules made under section 80DDB, the figures ‘10%’ mentioned in the sub-clause (d) shall be substituted by ‘15%’. [Third Proviso]

In other words, if the premium payable during any previous year for a policy issued on or after 1.4.2012 exceeds 10% / 15%, of the actual capital sum assured, the entire amount received under such policy shall be taxable.

(d)        If the policy is a Keyman insurance policy.

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(e)        If the policy is taken out for the benefit of a person who is not a relative of the policyholder.

(f)        If the policy is taken out for the benefit of a person who is not a resident of India.

No Exemption in respect of ULIP if the annual premium exceeds Rs. 2,50,000.

As per the Finance Act, 2021, the exemption under Section 10(10D) of the Income Tax Act, 1961 is not available for the amount received under a unit-linked insurance plan (ULIP) if the annual premium payable for any of the previous years during the term of the policy exceeds Rs. 2,50,000.

Nothing contained in this clause shall apply with respect to any unit linked insurance policy, issued on or after 1.2.2021, if the amount of premium payable for any of the previous year during the term of such policy/policies exceeds Rs. 2,50,000. [Fourth Proviso]. In other words, amount received on maturity of such policy shall be taxable.

Provided also that if the premium is payable, by a person, for more than one unit linked insurance policies, issued on or after the 1.2.2021, the exemption of this clause shall apply only with respect to those unit linked insurance policies, where the aggregate amount of premium does not exceed the amount referred to in fourth proviso (i.e. Rs. 2,50,000) in any of the previous year during the term of any of those policies. [Fifth Proviso]. In other words, if the aggregate amount of premium exceeds Rs. 2,50,000, the amount received on maturity of each policy shall he taxable.

However, the above fourth and fifth provisos shall not apply to any sum received on the death of a person. [Sixth Proviso]

Examples:

(1)        An individual purchases a life insurance policy with a sum assured of Rs. 10,00,000 on 30th March 2012. He pays an annual premium of Rs. 2,00,000.

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The individual dies after 10 years. The nominee receives the sum assured of Rs. 10,00,000.

The entire amount of Rs. 10,00,000 is exempt from tax under Section 10(10D).

Note: The exemption under Section 10(10D) is also available for the following:

  • Bonus received on a life insurance policy.
  • Maturity proceeds of a life insurance policy.
  • Death benefit received on a life insurance policy.

(2)        An individual purchases a life insurance policy with a sum assured of Rs. 10,00,000. The policy is in force for 10 years and the individual pays a premium of Rs. 1,00,000 per year.

On the death of the individual during the policy term, the death benefit of Rs. 10,00,000 is received by his legal heirs. The entire amount of Rs. 10,00,000 is exempt from tax under Section 10(10D).

Alternatively, if the individual survives the policy term, he receives the maturity benefit of Rs. 10,00,000. The entire amount of Rs. 10,00,000 is exempt from tax under Section 10(10D).

Important Notes:

  1. Where the premium/aggregate premium of such policy/policies exceed Rs. 2,50,000 such ULIP shall he treated as capital asset under section 2(14).
  2. As per section 45(1B), any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed.
Keyman insurance policy means a Life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration.
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