Section 10 (10D) of the Income Tax Act: Eligibility Criteria, Benefits, and Exemptions

 

In today's scenario of ever-increasing inflation, life insurance ensures the financial security of your loved ones. A life insurance policy allows your family members to fulfil plans like education, marriage or home loan repayments even in your absence. In case of the policyholders' death, the nominee of a life insurance plan will receive a sum assured amount.

A life insurance policy also brings to the table several tax benefits that allow the beneficiaries to claim the full insurance payout. Section 10(10D) of the Income Tax Act lets you enjoy tax exemption on your insurance claims, maturity amount and bonus. In this blog, we will provide comprehensive knowledge about this section.

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

Section 10 (10D) sets the rules for monitoring taxation on life insurance claims during instances of death or maturity benefit. According to this section, a person can avail tax exemptions on their premium paid for policies purchased on or after 1st April 2012. To enjoy this tax benefit, during one’s ongoing insurance, the premium paid by him/her during the policy term must not be more than 10% of the sum assured.

Furthermore, according to Section 10 (10D), there is an amendment for a person purchasing ULIP policy on or after 1st February 2021. Such individuals can avail tax exemption on maturity if the premium payable does not exceed 10% of the sum assured in r any of the years during the policy term. Alongside, to avail this benefit, his/her premium paid must not exceed Rs. 2, 50,000 in any year during the policy term.

For life insurance policies other than ULIP issued on or after 1st April 2023, the threshold limit of annual premium during the tenure of the policy is set to Rs. 5, 00,000.

Note that the above limitations of tax benefits under Section 10 (10D) of Income Tax Act apply to maturity proceeds only and not on the sum received upon the policyholder’s death. Death benefits are completely tax free, except in the cases keyman insurance.

Exemptions under Section 10 (10D) of Income Tax Act

The conditions under which a person can avail tax exemptions above the 10% sum assured limit (but less than 15% of sum assured) are listed below:

• In case of any disability or severe disability of the policyholder, the exemption will be available if the annual premiums do not exceed 15% of the assured sum.
• In case person suffering from disease or ailment as specified under Income Tax Act.

Benefits of Understanding Section 10 (10D)

Life insurance or term insurance provides monetary cover to a person's life for a specific period. With a policyholder's death during this period, insurance company pay the nominee the entire sum assured.

Section 10(10D) avoids taxation on the sum assured and relevant bonus that the policyholder and his/her nominee receive. The maturity amount that the policyholder will receive at the end of tenure is also tax-exempt according to this section.

Tax Exemption for ULIP Plans Under Section 10(10D)

According to the Finance Bill of 2021, any ULIP plan purchased on and after February 2021 which exceeds an aggregate annual premium of Rs. 2, 50,000 will not receive tax exemptions under Section 10(10D). However, in case of the policyholder’s death, the death benefit that a nominee receives will be entirely tax-exempt.

For life insurance policies that are not ULIP and are issued on or after April 1, 2023, one can avail tax exemption on the proceeds of the policy if premium paid for any of the year during the policy term does not exceed 10% of the sum assured. Additionally, for availing this exemption, the aggregate annual premium amount (for all the non-ULIP insurance policies) for the policyholder during the policy term must be below Rs. 5, 00,000.

The exemption can also be claimed (on policies issued after 1st April, 2013) if the premium paid is up to 15% of the sum assured in two situations:

• The premium is paid for a person suffering from a particular disease (as defined in Section 80DDB) or
• The premium is paid for a person suffering from disability (as defined in Section 80U)

Analysis of Amendments Proposed in Section 10(10D)

The points below throw light on a detailed analysis of Amendments proposed in Section 10(10D).

1. When Exemptions Are Not Allowed Under Section 10(10D)

Under the given instances, a person cannot avail tax exemption under Section 10(10D) of Income Tax.

• Excess Premium on Life Insurance Policy

Section 10(10D) states that a policy proceeds are tax-exempt if its premium is below 10% of the actual sum assured. However, if it exceeds 10%, the proceeds from that policy are not tax-exempt. This scenario is referred to as excess premium on life insurance policies.

• High Premium Life Insurance Policies

Sixth and Seventh Proviso to Section 10(10D) were included in Finance Bill 2023 to discuss payment of excess premiums. According to this amendment, insurance policies purchased from April 2023 with a premium amount exceeding Rs. 5 lakh for a year will not receive any tax exemption.

According to Sixth Proviso, life insurance policies with premiums above Rs. 5 lakh will not be exempt from taxation u/s 10 (10D). The Seventh Proviso addresses situations where a person has multiple policies under his name.

According to this amendment, you can avail tax exemption under Section 10(10D) for all active policies under your name. However, this exemption is only available if the aggregate premium of all policies during a year of its tenure is less than Rs. 5 lakh.

If the total premium of all these policies exceeds Rs. 5 lakh in a year, then only those policies will fall under Section (10D) exemption whose sum of premium is less than the mentioned limit.

2. Exemptions Allowed Under Section 10(10D) of Income Tax Act

Sub-clauses (c) and (d) of Section 10(10D) do not apply to any life insurance policy where the beneficiary receives a sum upon the policyholder’s death. The above-mentioned fourth and fifth provisions on ULIP proceeds also do not apply for death benefits. Accordingly, death benefits shall be completely tax free.

Advantages of Term Insurance Regarding Section 10(10D)

Term insurance helps you with financial coverage for a predetermined period against accidents, severe illness or death. In such instances, this insurance is paid to the nominee.

Under Section 10(10D) of the Income Tax Act, you can enjoy tax deduction on the amount which you will receive as a sum assured.

Eligibility Criteria for Section 10(10D)

You must fulfil the following conditions to be eligible for tax exemption under Section 10(10D).

• Both Indian & NRI’s can avail this tax exemption
• Exemption under Section 10(10D) is available under both Old & New Tax Regime.
• Premium to be within the threshold as mentioned in Section 10(10D)
• Life insurance claim payouts, maturity, bonus and death benefits are eligible for tax exemption under this section.

An Overview of Section 10 (10D): Taxation Background

Section 10(10D) of Income Tax Act allows tax exemption on the sum assured and accrued premium at the time of filing income tax returns. All kinds of life insurance claims are eligible for this exemption.

The premiums that you need to pay towards your life insurance policy are also eligible for tax deduction under Section 80C. Under this section, you can avail a maximum tax deduction of Rs. 1.5 lakh in a fiscal year.

Furthermore, ULIP plans whose total premium is below Rs. 2.5 lakh in a financial year at the time of maturity or partial withdrawal is subject to tax exemption u/s 10(10D).. It is important to note that tax exemptions under section 10(10D) are not accessible for a Keyman insurance policy.

How Does Section 10 (10D) Work?

To understand the workings of Section 10(10D), let’s consider a simple example.

Let's assume, Mr Ahuja purchased a life insurance policy for Rs. 5 lakh and pays Rs. 50,000 premium annually. After five years, he plans to surrender this policy and receive Rs. 3 lakh as a surrender amount. According to Section 10(10D) of Income Tax Act, this surrender amount will be tax-exempt as this policy is held for more than 2 years.

If the policy is not subject to tax exemption under Section 10(10D), first evaluate your returns from life insurance. Then, subtract this paid premium from your life insurance proceeds to find out your taxable income.

If you hold a policy for less than two years, the entire amount will be taxable.

What Are the Requirements for Maturity Returns Under Section 10(10D)?

The following conditions must be fulfilled for life insurance maturity proceeds to be eligible for Section 10(10D) tax benefits.

• Maturity payouts must not be among policies enlisted under Section 80DD (3) of the Income Tax Act.
• The maturity payouts must not be from a Keyman insurance policy.
• For insurance policies bought after April 1, 2012, your premium must not exceed 10% of your sum assured.
• For policies bought after April 1, 2013, the premium amount must not exceed 15% of your sum assured, for insurance on the life of -

- A person with a disability defined as per Section 80U

- Policyholders with any ailment mentioned under Section 80DDB

• The proceeds received are not under a pension plan or an annuity plan If your insurance plan’s maturity amount does not fall under exemptions of Section 10(10D), there will be a TDS deduction based on the following factors:

- A 5% TDS deduction on the net income (maturity amount less premiums paid) will apply on the submission of PAN details to the insurer.

- A 20% TDS deduction will be applicable on your net income (maturity amount less premiums paid) if you do not submit your PAN details to the insurer.

Tax on a Single Premium Insurance Plan

The maturity proceeds and the premium paid for a single premium policy are eligible for tax benefits. The maturity proceeds are exempt from tax under Section 10(10D) only if the total premium does not exceed 10% of the sum assured amount. If the premium paid is higher than this amount, only the difference between the maturity proceeds and the premium paid will be taxable.

Deduction Limit under Section 10 (10D)

Claim payouts and bonuses from all kinds of insurance are eligible for tax deduction under Section 10(10D) of Income Tax Act. However, there is no upper limit for tax deductions under this section if all applicable conditions are fulfilled.

The Best Ways to Use Section 10 (10D)

Section 10 (10D) can be an essential tool to manage your finances economically. However, you must know the ways to use it wisely for your financial benefit. Here are three best ways to use Section 10 (10D) of a life insurance policy wisely.

• Regularly Monitor Your Policy’s Performances

These are long-term investments and therefore there are probable chances for their performance to change with time. Hence, policyholders must track their policy's performance closely.

This will help you know whether your policy is performing well to provide sufficient coverage for your future needs. You must also study your policy's cash value and fees and charges periodically. If you notice that the policy is not offering returns as per your expectations, you can connect with your insurer to learn about other viable options.

• Have a Clear Knowledge of the Policy's Terms and Conditions

Consider reviewing the policy document minutely and understand the terms and conditions before opting for tax exemption under Section 10(10D). You must check the cash value, fees, additional charges, interest rates and penalties for loans or withdrawals.

• Use the Section 10 (10D) Strategically

Partial Withdrawals can be used to fulfil short-term requirements like a child's education, weddings and unexpected medical expenses. However, one must remember that any claim or premature withdrawal will lower the death sum assured under the policy and the policy may lose the benefit of Section 10(10D). Having separate term insurance cover and investments can be helpful in this situation.

FAQ's on Section 10 (10D)

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

Section 10(10D) of the Income Tax Act allows tax exemption on maturity benefits or sum assured that you receive from a life insurance policy in case of death or severe illnesses of a policyholder.

Q. What are some points to keep in mind regarding Section 10 (10D) of Income Tax Act?

Section 10(10D) offers tax deduction on maturity benefits and bonuses from any life insurance policy. However, the premiums paid under life insurance policies must be within prescribed limits to be eligible for tax exemption.

Q. What are the exceptions under Section 10 (10D) of the Income Tax Act, 1961?

Any payouts which you will receive under Section 80DD (3) or Section 80 DDA (3) and returns from Keyman insurance policy are not exempt under Section 10(10D).

Q. What is the Section 10 (10D) exemption limit?

There is no upper limit for deduction under Section 10(10D) of Income Tax Act for maturity benefits and bonuses from any life insurance claims.

Q. Is Section 10 (10D) removed?

Tax exemption of life insurance maturity benefits under Section 10(10D) is applicable for both new and old tax regimes of the Income Tax Act.

Q. What is the Section 10 (10D) amendment in Budget 2023?

The Finance Act 2023 amended Section 10(10D) of the Income Tax Act to remove tax exemption from all policies (non-ULIP) purchased after 1st April 2023 where the aggregate premium exceeds Rs. 5 lakh.

Summing Up

Section 10(10D) of the Income Tax Act is an important provision that allows maturity returns from any life insurance to be tax-exempt. This section is an economical measure to reduce your taxable income. It is also beneficial to support nominees of policyholders financially in cases of sudden death. Therefore, you must use this section wisely after conducting thorough research about your policy.

Related Articles:

• Section 10 of the Income Tax Act
• Life Insurance Tax Benefits in India
• Term Insurance Tax Benefits Under Section 80C & 80D
• Deductions under 80C
• How HDFC Life Retirement Plans Help You Save on Taxes?
• Income Tax Act of 1961: Sections, Goals, Characteristics, and Clauses

ARN - INT/ED/04/24/10989