18 Feb, 2022 | Term Life Insurance

Have a life insurance policy? You can claim these tax benefits under Section 10(10D) of the Income Tax Act, 1961

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There are a multitude of long-term tax-saving investment options available for you today. A life insurance policy is considered to be one of the most popular ones. 

Life insurance policies provide a life cover along with long-term savings and investment options, allowing you to secure your family’s financial future. It offers a host of other benefits as well and is categorised into many types. While this is the bona fide purpose of purchasing such a policy, Section 10(10D) of the Income Tax Act, 1961 encompasses within itself some valuable tax benefits for the same.

Insurance Plans Covered Under Section 10(10D)

All life insurance policies that either offers a death benefit (a fixed sum of money to your family if you pass away during the policy term) or a maturity benefit (amount that is paid when your policy term ends) like term insurance policies, ULIPs, money-back plans, retirement policies, child insurance policies, endowment plans, etc. qualify for tax benefits under Section 10(10D) of the Income Tax Act, 1961.

Let us have a detailed look at the provisions that govern the tax benefits that are provided by these policies and the conditions that need to be fulfilled to avail these benefits. 

What Is Section 10(10D)? 

As per Section 10 (10D), the life insurance claim amount and bonus (if any) will be completely tax-free for the receiver, regardless of whether the amount is received on - 

  • The death of the insured
  • Surrendering the policy (ending the policy mid-term)
  • Maturity of the policy (completion of the policy term) 

Exemption Provisions Under Section 10(10D)

You can get tax benefits under Section 10(10D) only if the following conditions are fulfilled -

  1. If the life insurance policy is issued before 1st April 2012, the premium payable should not exceed 20% of the sum assured.
  2. If the life insurance policy is issued after 1st April 2012, the premium payable should not exceed 10% of the sum assured.

In case you’re categorised as disabled or suffer from any ailment as per Section 80U or Section 80DDB of the Income Tax Act, you can claim tax benefits under Section 10 (10D) only if the following conditions are fulfilled - 

  1. If the life insurance policy is issued before 1st April 2013, the premium payable should not exceed 10% of the sum assured.
  2. If the life insurance policy is issued after 1st April 2013, the premium payable should not exceed 15% of the sum assured. 

Requirements Under Section 10(10D) For Maturity Returns

You can get tax benefits under Section 10(10D) on the amount you receive on the maturity of the life insurance policy if the following conditions are fulfilled - 

  1. The claim is paid on the death of the insured person.
  2. The maturity benefit that is paid should not be available under a keyman insurance policy.
  3. The amount paid is not an annuity or pension policy payout.
  4. The payout received should not be under an employer-sponsored group insurance policy.
  5. If the policy is purchased between 1st April 2003 and 31st March 2012, the premiums paid during any year should not be more than 20% of the sum assured. 
  6. The premium payments made should not exceed 10% of the policy sum assured if the policy is purchased after 1st April 2012.

Tax Rules On Surrendering A Life Insurance Policy

Surrendering a policy means ending a policy mid-term or before the maturity date of the policy. There are specific tax rules on surrendering life insurance policies and they depend on the type of plan you have. 

Policy TypeCondition
Traditional Life Insurance Policy (Endowment plan or a Money-back plan)Pay premiums regularly for initial two years
Single-Premium Life Insurance PolicyHold the policy for at least two years
Unit Linked Insurance PlanSurrender the policy after five years from the date of purchase

 If you decide to surrender your life insurance policy, the surrender benefit will not be taxable under Section 10(10D) if the conditions mentioned in the table below are fulfilled. 

Apart from the above-mentioned conditions, the date of issuance of the policy also determines the taxability of the surrender value. If the conditions mentioned in the below table are met, the surrender value will not be taxable.

Policy IssuedCondition
Before 31st March 2003No condition
Between 1st April 2003 to 31st March 2012The sum assured should be at least five times the annual premium amount
On or After 1st April 2012The sum assured should be at least 10 times the annual premium amount
On or After 1st April 2013

1- The sum assured should be at least 6.67 times the annual premium amount

2- You’re categorised as disabled or suffer from any ailment as per Section 80U of the Income Tax Act

What If You Don’t Meet Any Of These Conditions?

If you’re surrendering your life insurance policy and don’t meet any of the criteria mentioned above, then the surrender amount you receive will be taxable under the Income Tax Act. In addition to this, the surrender amount will not be tax-free under Section 10(10D) of the Income Tax Act, 1961 either. It will be treated as ‘income from other sources’ and taxed as per the existing tax bracket.

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Key takeaways
  1. Life insurance policies offer you tax benefits under Section 10(10D) of the Income Tax Act.
  2. The life insurance claim amount plus any bonus received either on the death of the insured or on ending the policy mid-term or on policy maturity will be completely tax-free for the receiver, subject to certain conditions, as per Section 10(10D).
  3. If you end a life insurance policy in the middle of the policy term, the surrender amount you get will be exempted from tax only if certain conditions are fulfilled.
Team Beshak
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