Section 10(10D)  

A life insurance policy provides financial protection to a family after the policyholder’s demise. It helps the family members meet their financial needs and essential expenses with ease. However, the money received as insurance benefit counts as income and falls under the ambit of income tax.

To reduce the tax burden on Indian citizens, the Government of India has laid down Section 10 (10D) of the Income Tax Act for offering tax exemptions on any benefits received under a life insurance policy.

Why is Life Insurance Important?
 

A term insurance plan provides financial stability to your loved ones in case of any unfortunate event such as death of the life assured. The beneficiary or the nominee will receive a tax-free^# lump sum amount to help them through this challenging time.

One of the important benefits of Life Insurance such as a term insurance plan is that it is one of the most affordable plans and the premiums are lower when compared to other types of life insurance. It is an easy way to give your loved ones the peace of mind they deserve in case of any unfortunate events.

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What Is Section 10(10D) Of the Income Tax Act, 1961?
 

Section 10(10D) of the Income Tax Act of 1961 specifies the rules concerning the taxability of claims, such as death and maturity benefit. It allows an individual to avail of tax exemption on the accrued bonus and sum assured (if any) received through their life insurance policy.

The exemptions are available on all types of life insurance policy claims and include surrender values and bonuses as well. Individuals (salaried and non-salaried), Associations, Bodies of Persons, Hindu Undivided Families (HUFs), Trusts, Companies, Foreign Companies, and others are eligible to claim these exceptions.

Let us understand the provision with the help of a hypothetical scenario. Mr Jain purchased a term insurance plan and nominated his son as a beneficiary. Mr Jain lost his life in an unfortunate road accident. The insurance provider disbursed the death benefit to his son.

Now, this lump sum seems like an income, even when it is not. Section 10(10D) prevents the amount of money paid out to your family member by the insurer from being seen as income. It ensures that the money is exempted from the calculation of income for taxation purposes.

What Are the Tax Exemptions Under Section 10(10D)?
 

The different tax benefits one can avail under Section 10(10D) of the Income Tax Act, 1961 include:

• One qualifies for 10 (10D) tax exemptions if the premium payable in any fiscal year during the policy term for a life insurance plan purchased on or after April 1, 2003, and on or before March 31, 2012, does not exceed 20% of the sum insured.
  
  
• If the policy is bought on or after April 1, 2012, the premium payable must not exceed 10% of the insurance to qualify for tax exemptions.
  
  
• In case the insured is severely ill or disabled, the exemption is on a policy purchased on or before April 1, 2013, where the premium does not exceed 15% of the assured sum.
  
  
  • The diseases accepted under this exemption are listed in Section 80DDB.
    
    
  • The disabilities considered for this exemption are specified under Section 80U of the act.
     

Eligibility Criteria for Tax Benefits Under Section 10(10D)

To be eligible for tax exemptions under Section 10(10D) of the Income Tax Act, it is vital to meet the following conditions:

1. Under Section 10(10D), policyholders can avail of the applicable tax benefits for life insurance policies of Indian and international life insurance companies.
2. All claims from life insurance policies are eligible for tax deductions.
3. The provision offers tax deductions on money received from a life insurance policy, including maturity benefits, death benefits, and earned incentives.
4. There is no restriction on the maximum value of the demand for life insurance coverage.
5. On the payout within the Keyman Insurance Policy, there are no tax deductions.
6. The premiums or monthly payments paid in any given year throughout the policy’s period cannot go beyond 20% of the sum assured for plans purchased between April 1, 2003, and March 31, 2012.
7. The premiums cannot be more than 10% of the sum insured for life insurance policies purchased on or after April 1, 2012.
8. During the policy’s lifetime, the life insurance premium in any year should not go beyond 15% of the cash value. The purchase date must also be on or after April 1, 2013. Moreover, life insurance should be for any person who meets the following requirements:
   
   
   • Individuals suffering from any ailment or disease listed in the rules of Section 80DDB of the Income Tax Act, 1961.
   • Individuals having a disability, or a developmental disability as specified in Section 80U of the Income Tax Act, 1961.
      

Tax on a Single Premium Insurance Policy
 

Section 10(10D) does not provide exemptions on the maturity amount from a single premium insurance policy. But there are no taxes on the maturity benefit amounts if the sum assured is ten times the amount of premium payable for the policy duration.

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

The Finance Bill 2021 proposed amendments to Section 10(10D) tax exemptions suggesting that the provision must not apply to ULIPs purchased on or after February 1, 2021, and the aggregate annual premium of all plans due in a fiscal year is more than ₹2,50,000. After the ULIP policy does not qualify for the exemptions, it will remain as is except at the time of death claim. The premium amount payable includes top-up premium, riders, GST and loading on riders (if any).

As per the amendments, ULIP plans will be categorised as capital assets. All maturity, surrender, or partial withdrawal proceeds will be taxed to the policyholder as Capital Gains.

In the unfortunate event of death, the entire death benefits are tax exempted. Regardless of the threshold on aggregate premium, the benefits received on the death of the policyholder will continue to be tax-free.