Taxation of Life Insurance Policies | Section 10(10D)

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  • Last Updated on 21 March, 2023

tax on life insurance policy

Table of Contents

1. Concept and Types of Life Insurance

2. Current Tax Provisions

3. Proposed Amendment

4. Analysis of Amendments Proposed in Section 10(10D)

5. Overview of Tax on Various Life Insurance Policies

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1. Concept and Types of Life Insurance

Life insurance is a valuable financial agreement between an individual and an insurance company that offers death benefits to the beneficiaries of the policyholder in the event of his death. Beyond death coverage, life insurance policies also serve as savings instruments, providing financial security and stability to policyholders and their families. The life insurance industry offers several types of policies that vary based on their features and benefits.

1.1 Term Life Insurance

This life insurance offers coverage for a specific and predetermined term. If the policyholder passes away during the term, the death benefit is paid to the beneficiaries. Term life insurance is a simple and cost-effective option, providing only death benefit protection without any savings or investment components.

1.2 Endowment Policy

This type of life insurance acts as both an insurance and savings instrument. It aims to provide maturity benefits to the policyholder, such as a lump sum payment at the end of the policy term, even if a death claim has not been made. This type of life insurance is best suited for individuals looking for coverage and risk-free returns.

1.3 Unit Linked Insurance Plan (ULIP)

This type of life insurance allows the policyholder to invest the cash value component in various investment options, including stocks and bonds. The death benefit and cash value of the policy are subject to the performance of the investments. ULIP is a complex and risky option compared to other types of life insurance and is typically suitable for experienced investors with a long-term investment horizon.

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2. Current Tax Provisions

In terms of taxation, the sum received under a life insurance policy is exempt from tax under Section 10(10D). However, this exemption has been misused in the past by high-net-worth individuals who invest in policies with large premium contributions and claim exemption on the sum received. To prevent the abuse of tax exemptions, several changes have been made to the relevant provisions:

(a) The Finance Act, 2003 introduced a limit on the premium payable for any year during the term of the policy. Where the premium exceeds 20% of the sum insured in any year, no exemption will be granted for the sum received under such insurance policy.

(b) The Finance Act, 2012 further reduced the threshold limit to 10% for policies issued on or after 01-04-2012.

(c) The Finance Act, 2021 introduced a monetary cap on the premium payable in respect of unit-linked insurance policies (ULIPs), disallowing exemption if the premium payable for any year during the term policy exceeds
` 2,50,000.

After the Finance Act, 2021, both the monetary and percentage caps apply to ULIPs. Further, in the Finance Act, 2021, ULIPs were included in the definition of a capital asset, clarifying that income from ULIPs shall be taxable under the head capital gains. However, for other life insurance policies, only the percentage cap remains, and there is no clarity as to under which head the income shall be taxable.

3. Proposed Amendment

In the Union Budget 2023, a monetary limit is proposed on other life insurance policies, and the following provisions have been inserted in Section 10(10D) in this respect:

(a) It is provided that no exemption shall be available in respect of life insurance policies (excluding ULIP) issued on or after 01-04-2023 if the premium payable for any year during the term of policy exceeds ` 5 lakhs [Sixth proviso to Section 10(10D)].

(b) If the premium is payable by a person for more than one life insurance policy, the exemption shall be available only for those life insurance policies (other than ULIPs), where the aggregate amount of premium does not exceed ` 5 lakhs in any of the previous years during the term of any of those policies [Seventh proviso to Section 10(10D)].

(c) The above provisos shall not apply where the sum is received on the death of a person [Eighth proviso to Section 10(10D)].

Further, it is provided that any amount received under life insurance policies (other than ULIPs) shall be taxable under the head of other sources if not exempt under Section 10(10D). The following provisions have been inserted in this respect:

(a) Sum received under life insurance policies shall be treated as income [sub-clause (xviid) of Section 2(24)].

(b) The income from life insurance policies (other than ULIPs) shall be taxable under the head of other sources if not exempt under section 10(10D) [clause (xiii) of Section 56(2)].

(c) Sum received under life insurance policies, in excess of the aggregate of premium paid during the term of policy, shall be treated as income under the head of other sources. The rules shall also be prescribed for the computation of such income [clause (xiii) of Section 56(2)].

(d) Premium for which deduction has been claimed under any provision of the Act (such as Section 80C) shall be ignored while computing the income from life insurance policies under the head of other sources. [clause (xiii) of Section 56(2)]

Considering the amendments proposed in Union Budget 2023, the taxability of life insurance policies (other than ULIPs) can be categorized into the following:

(a) Exemption under Section 10(10D);

(b) Taxability and classification of income (Section 2 and Section 56); and

(c) Deduction under Section 80C.

4. Analysis of Amendments Proposed in Section 10(10D)

4.1 When is an exemption allowed under section 10(10D)?

Section 10(10D) provides for exemption with respect to any sum received under life insurance policy, including the sum allocated by way of bonus on such policy. However, if the premium paid is in excess of the limits prescribed, no exemption will be provided except in case of the death of the policyholder.

4.2 When is exemption not allowed under section 10(10D)?

Exemption under Section 10(10D) is not allowed with respect to any sum received under the life insurance policies in the follow- ing cases:

4.2.1 Excess premium on life insurance policies

If the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured, then no exemption under this section would be allowed with respect to the sum received under the policy. Such a situation is hereinafter referred to as ‘excess premium life insurance policies’.

4.2.2 High premium life insurance policies

Besides restricting the exemption under Section 10(10D) for payment of excess premium, the Finance Bill, 2023 has proposed to insert the Sixth and Seventh Proviso to Section 10(10D) to provide that no exemption shall be available in respect of life insurance policies issued on or after the 01-04-2023 if the amount of premium payable for any of the previous year during the term of the policy exceeds ` 5 lakhs (‘high premium life insurance policies’).

The Sixth Proviso provides that no exemption shall be available for a policy acquired on or after 01-04-2023 if the premium paid in any year during the tenure of the policy exceeds ` 5 lakhs (single policy). So, where the premium payable for a policy exceeds ` 5 lakhs in any year during its tenure, no exemption under Section 10(10D) will be allowed with respect to such policy.

The Seventh Proviso deals with the situation wherein an assessee holds multiple policies at a given time. The said proviso allows the exemption for all those policies whose aggregate premium in any year during the tenure of such multiple policies is less than ` 5 lakhs. It implies that if the person has acquired more than one policy on or after 01-04-2023, and the premium payable for each of such policies during any year does not exceed ` 5 lakhs but the aggregate of premium payable for all such policies exceeds `5 lakhs in a year, the exemption under this section would be allowed only in respect of those policies whose aggregate premium is within such prescribed limit of ` 5 lakhs. In other words, the exemption shall be allowed only with respect to low premium policies, the aggregate of which is under ` 5 lakhs.

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For example, Let us determine whether the exemption is available under Section 10(10D) for a single policy purchased by four dif- ferent persons in the following scenarios.

Particulars Person A Person B Person C Person D
Date of investment in Insurance Policy 31-01-2023 15-04-2023 21-05-2023 31-07-2023
Premium payable every year (In lakhs) 3.40 4.00 6.30 8.00
Particulars Person A Person B Person C Person D
Sum assured (In lakhs) 50.00 45.00 70.00 70.00
Whether the amount of pre- mium exceeds 10% of the capital sum assured? No No No Yes
Whether the amount of premium during the year exceeds ` 5 lakhs? Not applicable No Yes Yes
Whether exemption avail- able under Section 10(10D)? Yes Yes No No

For example, Let us determine whether the exemption is available under Section 10(10D) for multiple policies purchased by one person on or after 01-04-2023 in the following scenarios.

Particulars Premium payable every year (In lakhs) Capital sum assured (In lakhs) Whether premium exceeds 10% of capital sum assured? Whether premium exceeds 5,00,000 Whether eligible for exemption under Sec. 10(10D)?
Policy A 5.50 55.00 No Yes No
Policy B 3.00 20.00 Yes No No
Policy C 4.25 40.00 Yes No No
Policy D 7.00 80.00 No Yes No
Policy E 4.00 80.00 No No Yes*
Policy F 4.90 60.00 No No Yes*
Policy G 0.55 10.00 No No Yes*
Policy H 0.45 9.00 No No Yes*

* Though the last four policies are eligible for exemption under Sec- tion 10(10D) but the exemption can be claimed in respect of only those policies whose aggregate premium during the year does not exceed ` 5 lakhs (i.e., low premium policies). The threshold limit of ‘5 lakhs should be exhausted for those policies first which have a higher yield, as it will, in turn, reduce the ultimate taxable income. If the income from such eligible policies is the same, the investor should consider Policy E, G and H as the aggregate premium of such policies equal to ` 5,00,000. If policy F is included, the limit of ` 5,00,000 cannot be exhausted fully.

4.3 Analysis of amendments proposed in Section 2 and Section 56

4.3.1 Taxability and classification of income

The taxability of the sum received under life insurance policies [if not exempt under section 10(10D)] has always been a disputed matter, whether it would be taxable under the head capital gains or other sources. It is also argued that in the absence of its inclusion within the meaning of ‘income’ under Section 2(24), it should be treated as capital receipts not chargeable to tax.

By making amendments to Section 2(24) and Section 56, the Finance Bill, 2023 has put this controversy to rest. Thus, the sum received from life insurance policies (other than ULIPs and Keyman insurance policy) shall be treated as income if not exempt under section 10(10D) and taxable under the head of ‘other sources’.

As per Section 56, the income from life insurance policies shall be computed as follows. The CBDT may also prescribe the rules for the same.

Particulars Amount
Sum received under life insurance policy, including bonus ***
Less: Aggregate amount of premium paid during the term of policy [Note] (***)
Taxable Income ***
Note: If the deduction for premium has been claimed under any other provision of the Act, the same shall not be included.

4.3.2 Impact of claiming deduction in respect of premium

Section 56 provides that if any deduction has been claimed in respect of premium under any other provision of the Act, it shall not be included in the aggregate amount of premium to be deducted for computing the income. The deduction for the premium paid in respect of the life insurance policy is allowed under Section 80C. However, deduction under Section 80C is restricted to 10% of the actual capital sum assured. It means if the person pays an exorbitant premium for an insurance cover, the deduction shall not be allowed for the entire premium. The deduction will be limited to 10% of the sum assured, and any amount of premium paid more than this limit is not deductible under Section 80C.

For example, Mr A has taken a life insurance policy with a sum assured of ` 10 lakhs and has paid a premium of ` 3 lakhs per annum. He can claim a deduction under Section 80C for the premium paid towards the life insurance policy. But the deduction is restricted to 10% of the actual capital sum assured, which is ` 1 lakh (10% of ` 10 lakhs). If he claims a deduction of ` 1 lakh for the premium paid towards the life insurance policy under section 80C, he will be allowed a deduction of the remaining ` 2 lakhs while computing income under Section 56.

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For example, Let us determine the amount of income taxable under Section 56 in the following scenarios.

Particulars Person A Person B Person C Person D
Date of investment in Insurance Policy

30-04-2023

15-04-2023 21-05-2023

31-07-2023

Tenure of Policy [A] 10 Years 10 Years 10 Years 8 Years
Sum assured (In lakhs) 50.00 45.00 70.00 70.00
Premium payable every year (In lakhs) [B] 3.40 4.00 6.30 8.00
Premium paid over the tenure of policy [C =A×B] 34.00 40.00 63.00 64.00
Whether the amount of premium exceeds 10% of the capital sum assured? No No No Yes
Whether deduction under Section 80C is available? Yes Yes Yes Yes
Amount of deduction available under section 80C every year over the tenure of policy [D] 1.5 1.5 1.5 1.5
Total deduction claimed over the tenure [E= A × D] 15.00 15.00 15.00 12.00
Aggregate amount of premium deductible under Section 56 [F = C-E] 19.00 25.00 48.00 52.00
Whether the amount of premium during the year exceeds

` 5 lakhs?

No No Yes Yes
Whether exemption available under Section 10 (10D)? Nil Nil No No
Particulars Person A Person B Person C Person D
Consideration received on Maturity [G] 65.00 60.00 87.00 90.00
Amount Taxable on maturity under Section 56 [H = G-F] 46.00 35.00 39.00 38.00

5. Overview of Tax on Various Life Insurance Policies

Particulars Term Insurance Endowment Policy ULIPs
Deduction under section 80C for premium paid Up to 10% of sum assured Up to 10% of sum assured Up to 10% of sum assured
Exemption under Section 10(10D) Exempt Exempt if premium payable for any year during the term of policy is does not exceed 10% of sum assured and ` 5,00,000 Exempt if premium payable for any year during the term of policy does not exceed 10% of sum assured and ` 2,50,000
Relevant head of income Not Taxable Other Sources Capital Gain
Tax rates Not taxable Normal Slab Rate
  • High premium equity-oriented ULIPs: short-term at 15% under Sec. 111A and long-term capital gains at 10% under Sec. 112A
  • Other ULIPs: Normal slab rate in case of short-term and 20% in case of long- term capital gains.

The new provisions shall apply from the assessment year 2024-25.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

24 thoughts on “Taxation of Life Insurance Policies | Section 10(10D)”

  1. Why is “Nil” exemption available u/s 10(10D) in respect of person A & B in the table – “For example, Let us determine the amount of income taxable under Section 56 in the following scenarios”

  2. Hi,
    if i am taking a policy of hdfc life sanchay plus before 1-Apr-2023 with a paying term of 8 years and policy term of 10 years with installment amount 10,00,000 ( Ten lakhs) , will the guaranteed amount payout , insured sum and maturity amount is taxable or excluded from the taxes ?

    Br
    Aljo

    1. Policy issued before 01-04-2023 shall continue to be eligible for tax exemption under Section 10(10D) even if the amount of premium exceeds Rs. 5 lakh

  3. I do have one doubt.

    Let’s suppose I have a policy having a premium of Rs. 4 Lakh p.a which was bought on 5-1-2020. But on 2 April 2023. I have purchased the new policy of Rs. 2 LPA.

    So, the total premium now I pay is Rs. 6 Lakh p.a. Does this amount now come under an exemption or not after 1 April 2022?

  4. Are premium calculations done exclusive of GST or on total premiums inclusive of GST. For instance – I purchase a policy with Premium of 5L (excl. GST). But including the GST amount the premium comes up to 5,22,500/-. So in this case will the maturity proceeds be tax exempt or taxable?

    1. Any sum received under a life insurance policy (Other than ULIP and keyman insurance policy) is exempt from tax under Section 10(10D) if the amount of premium paid for any year during the term of the policy doesn’t exceed a specified percentage of the sum assured or Rs. 5,00,000.

      A premium means the payment made for the insurance. As GST is a tax on the insurance service provided by the insurance company and not towards the insurance coverage, it will not be included in the amount of premium to be deducted to compute the taxable income.

      So in this case, the premium amount doesn’t exceed Rs. 5,00,000, so maturity proceeds of the policy will be exempt under Section 10(10D).

  5. I had taken ICICI prulife life stage pension as a NRI. The maturity was originally in 2018 and the maturity amount could be availed only as Pension after 2018 . As I did not want to take the pension like that, the vesting was postponed for 10 years as advised by them, and in 2022, the policy was surrendered to get the full amount , with out opting for pension. The amount was credited in NRE account. But there was a TDS of 33% for the capital gain. Is this amount refundable ? If so under which section it can be claimed while filing ITR ?

    1. We can’t comment on the taxability without getting complete details of the policy. For further assistance, please contact us at sales@taxmann.com.

  6. Hi, Thanks for this useful information. Kindly clarify in section 10(10d) exemption is applicable for non-ulip premium amount of Rs. 5L per year. But this 5L premium per year is including GST or excluding GST.

    1. Any sum received under a life insurance policy (Other than ULIP and keyman insurance policy) is exempt from tax under Section 10(10D) if the amount of premium paid for any year during the term of the policy doesn’t exceed a specified percentage of the sum assured or Rs. 5,00,000.

      A premium means the payment made for the insurance. As GST is a tax on the insurance service provided by the insurance company and not towards the insurance coverage, it will not be included in the amount of premium to be deducted to compute the taxable income.

  7. IN THE EXAMPLE IN TABLE 4.3.2 FOR PERSONS A&B ,THE PREMIUM PAID DOES NOT EXCEED 1O% SUM ASSURED AND ALSO LESS THAN 5 LAKHS .BUT WHY EXEMPTION UNDER SECTION 10(10D) IS NIL

  8. I have an endowment policy of 10 lakhs taken in year 2016 with annual premium of 1.2 Lakhs however maturing in the year 2026, hence due to be accounted in assessment year 2027-2028, will it be taxable ?

    if taxable, let us what would be taxable amount eligible to be charged for tax assuming premium is taken as 80c exemption..

    premium paid :- 1.2 lacs ,total paid for 10 years 12 lacs
    maturity amount is 15 lacs
    so the taxable amount is 3 lacs ? right ?

    1. “If the premium payable for any of the years during the term of the policy exceeds certain percentage (10%) of the actual capital sum assured, then no exemption under section 10(10D) would be allowed with respect to the sum received under the policy.
      Further, the sum received under excess premium life insurance policies is chargeable to tax under the head ‘other sources’ as per Section 56(2)(xiii). It provides that the sum received under a life insurance policy in excess of the aggregate premium paid during the policy term shall be taxable.
      However, if the premium has been claimed as a deduction under any other provision of the Act, it shall not be included in the aggregate of the premium to be deducted while computing the taxable income.
      In this case, the taxable amount will be Rs. 15 Lacs as the total amount of premium is already claimed as a deduction u/s 80C.”

  9. I have taken LIC Policy in NOVEMBER 2002 of Sum Assured Rs 500000/- with annual premium of Rs 32000/- per annum. On Maturity after 20 Years term in November 2022. LIC has deducted TDS@ 10% i.e Rs 64000/- on bonus amount of Rs 6,40,000/-. When the policy was issued to me it was told to me that the bonus will be exempted from the tax under 10D. But why LIC deducted TDS on maturity bonus and my question is weather bonus is taxable or not for this LIC policy.

    1. As per Section 194DA, any payment in respect of a life insurance policy to a resident person shall be subject to deduction of tax at source at the rate of 5% on the income component comprised within the amount payable by the insurance company. The tax shall be deducted at the time of payment if the gross amount of payment made in respect of the life insurance policy exceeds Rs. 1 lakh.

      However, it doesn’t mean that such amount is taxable in the hands of recipient. it depends on other conditions of Section 10(10D). if your consideration is exempt as per provision of Section 10(10D), you can claim such amount of TDS while filing a return of income.

  10. By Actual Sum Assured, they mean the Base Sum Assured on which the Bonus is calculated or the Death Sum Assured? In some plans, the death sum assured is higher of 105% of Total Premiums Paid and 7 Times the Annual Premium. For example, let us take a plan with Sum Assured Rs.10 Lakhs and its Annual Premium without GST is Rs.1.10 Lakhs. It is more than 10% of Sum Assured, hence proceeds are taxable. But the death Sum Assured is 11.55 Lakhs (105% of Total Premiums Paid). In this case, the annual premium is less than 10% of the Death Sum Assured. So, will the maturity proceeds be tax-free?

    1. The term “actual capital sum assured” in relation to a life insurance policy shall mean the minimum amount assured under the policy on the happening of the insured event. Thus, in the given example, the actual capital sum assured should be Rs. 10 lakh.

  11. Hi,
    I had purchased ICICI Pru Elite Life Super in the year 2017, sum assured Rs 35 Lakhs and 5 Lakhs yearly premium. I paid premium for 5 years and surrendered the Policy in the year 2022. Pru life paid me approx 30 Lakhs and applied 5% TDS on the maturity benefits. Isn’t the maturity benefit exempt from tax under section 10(10D)? Appreciate your feedback. Thanks.

    1. Any sum received under a life insurance policy (Other than ULIP and keyman insurance policy) is exempt from tax under Section 10(10D) if the amount of premium paid for any year during the term of policy doesn’t exceed the specified percentage (10% if the policy is issued on or after 01-04-2012) of the sum assured.
      Where the sum under a life insurance policy, which is not exempt under Section 10(10D), is paid to a resident person, the tax shall be deducted under Section 194DA at the rate of 5% on the amount of income comprised in such receipt.

  12. I have taken 500000/- policy with 48000/- premium after April 2023. Now I am planning to invest in a Single Premium pension plan of Rs.500000/-(There is hardly any insurance coverage in pension plans). Will the aggregate premium be counted as 48000/- or 548000/-

    1. There is no exclusion available for such type of policy in section 10(10D). So, if it is a life insurance policy, it’s premium will be considered for eligibility of exemption under section 10(10D).

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