Section 10(10D) — When Insurance Maturity Proceeds Are Tax-Free in India

Section 10(10D) of the Income-tax Act 1961 is the provision that decides whether the lump-sum a household receives from a life-insurance policy — at maturity, on early surrender, or on the death of the insured — is taxable income or tax-free receipt. For a generation of Indian savers, the headline answer was straightforward: any sum received under a life-insurance policy, including bonuses, was exempt from tax. That headline answer is no longer accurate. Two waves of legislative change — the Finance Act 2021 carve-out for high-premium ULIPs, and the Finance Act 2023 carve-out for high-premium non-ULIP life policies — have made the maturity-tax outcome a function of issue date, premium level, and product structure.

What has remained consistent through these changes is that death benefits paid to a nominee on the death of the insured remain fully exempt under Section 10(10D), regardless of premium thresholds, product type, or issue date (subject to a narrow exclusion for keyman insurance proceeds). The maturity-side complexity exists only on the survival of the insured to maturity or on early surrender; the death-side has a clean and unconditional exemption.

This article walks through the original Section 10(10D) framework, the historical 10%-of-sum-assured premium condition, the Finance Act 2021 ULIP carve-out, the Finance Act 2023 non-ULIP carve-out with its ₹5 lakh aggregate threshold, the death-benefit and keyman exclusions, the interaction between Section 80C reversal and Section 10(10D) treatment of surrender amounts, and the regime-neutrality of the exemption. Worked examples in ₹ illustrate each branch.

1. The Original Section 10(10D) Framework

Section 10(10D) provides that any sum received under a life-insurance policy — including bonus thereon — is exempt from tax in the hands of the recipient, except in specifically listed cases. The exemption covers maturity proceeds, survival-period payouts on money-back contracts, and surrender proceeds, in addition to the death benefit.

For policies issued on or after 1 April 2003 and before 1 April 2012, the exemption was conditional on the annual premium not exceeding 20% of the sum assured. For policies issued on or after 1 April 2012, the threshold tightened to 10% of the sum assured (15% for severe disability or specified diseases). Where the premium-to-sum-assured ratio exceeded these thresholds, the entire maturity proceeds — not just the excess — became taxable as income from other sources, with TDS at 5% on income component under Section 194DA.

These pre-2021 rules continue to operate as a baseline. The two Finance Act changes that follow are layered on top — they apply only to specific issue-date and premium-level cohorts, and within those cohorts they over-ride the original framework.

2. The Finance Act 2021 ULIP Carve-Out

Effective from 1 February 2021, the Finance Act 2021 introduced a carve-out specifically for Unit-Linked Insurance Plans. For any ULIP issued on or after 1 February 2021, if the aggregate annual premium across all ULIPs held by the same individual exceeds ₹2,50,000, the maturity proceeds of the affected ULIPs lose Section 10(10D) exemption.

The taxable portion is treated as capital gains, with the same tax treatment as the underlying fund. For an equity-oriented ULIP (where 65% or more of the corpus is invested in domestic equity), gains are taxed under Section 112A — long-term capital gains at 12.5% above the ₹1,25,000 annual exemption (for transfers from FY 2024-25 onwards under the Finance (No. 2) Act 2024 changes), and short-term gains at 20%. For non-equity-oriented ULIPs, gains are taxed under Section 112 — long-term gains at 12.5% without indexation for transfers from 23 July 2024.

The ₹2,50,000 threshold is per individual, aggregated across all ULIPs issued on or after 1 February 2021 that the individual holds. Where the threshold is breached, only the policies whose premium the assessee elects to retain within the ₹2,50,000 ceiling enjoy continuing exemption; the remaining ULIPs are the 'affected' ones whose proceeds are taxed as capital gains. The CBDT has issued detailed Rule 8AD to compute the capital gains arising on such ULIPs, mapping the policy's NAV-linked value at maturity against the premium paid.

3. The Finance Act 2023 Non-ULIP Carve-Out

Effective from 1 April 2023, the Finance Act 2023 extended a similar premium-threshold logic to non-ULIP life-insurance policies — endowment, money-back, whole-life, and other traditional savings-linked policies. For any non-ULIP life-insurance policy issued on or after 1 April 2023, if the aggregate annual premium across all such non-ULIP policies issued on or after that date exceeds ₹5,00,000 in any year of the policy term, the maturity proceeds of the affected policies lose Section 10(10D) exemption.

The taxable portion is computed as maturity proceeds minus aggregate premium paid, and is taxed as 'income from other sources' under Section 56, at the assessee's marginal slab. This is a less favourable treatment than the capital-gains framing applied to ULIPs, because slab-based taxation can reach 30% (plus surcharge and cess) for high-income taxpayers, versus 12.5% under the long-term capital gains regime.

Crucially, the ₹5,00,000 threshold is aggregated across all non-ULIP policies issued on or after 1 April 2023 — not per policy. A taxpayer with two endowment policies issued in FY 2024-25, with annual premiums of ₹3,00,000 and ₹2,50,000 respectively, has aggregate non-ULIP premium of ₹5,50,000 and is over the threshold. The CBDT Circular 15/2023 dated 16 August 2023 clarifies how to allocate the threshold across policies — the assessee can elect which policies are within the ₹5 lakh exempt cap and which are outside, in any subsequent year of breach.

4. The Death-Benefit Carve-Out

Under Section 10(10D)(d), the death benefit paid by the insurer to the nominee on the death of the insured remains fully exempt from tax — irrespective of issue date, premium level, premium-to-sum-assured ratio, ULIP/non-ULIP status, or any other condition (except the keyman exclusion below). The 2021 and 2023 carve-outs apply only to maturity, surrender, and survival-benefit proceeds. The death-benefit exemption is unconditional.

This is the architectural reason pure-protection term insurance has remained outside the maturity-tax debate. Term insurance has no maturity proceeds — there is no payout if the insured survives the term. The only payout is the death benefit, and that is fully exempt under all regimes, all premium thresholds, and all issue dates. A separate consequence: TDS under Section 194DA does not apply to death-benefit payouts, because the underlying receipt is fully exempt.

5. The Keyman-Insurance Exclusion

Section 10(10D) explicitly excludes any sum received under a 'keyman insurance policy' — a policy taken out by an employer or business on the life of an employee or business owner whose loss would materially affect business operations. Proceeds of keyman insurance, whether paid to the employer/business or routed to the individual, are taxable as business income or as 'income from other sources', depending on the recipient.

This exclusion is narrow but worth noting because the conversion of a keyman policy into a personal policy on the same life does not automatically restore Section 10(10D) exemption. The Income-tax Department's stance, supported by judicial pronouncements, is that once a policy has been treated as keyman, its character continues for tax purposes for the duration of the policy.

6. Worked Examples

The following four scenarios illustrate how the rules combine.

Scenario 1 — Term Plan Death Benefit

A 30-year-old buys a 30-year term plan with sum assured ₹1,50,00,000 and annual premium ₹15,000. The insured dies in policy year 8. The nominee receives ₹1,50,00,000. The premium-to-sum-assured ratio is 0.01%, well below 10%, but in any case the death benefit is fully exempt under Section 10(10D)(d) regardless of any premium threshold. Tax liability of the nominee on this receipt — nil.

Scenario 2 — Endowment Maturity, Aggregate Premium Below ₹5 Lakh

A 35-year-old buys a 20-year endowment policy issued in FY 2024-25 with sum assured ₹15,00,000 and annual premium ₹1,20,000. The premium-to-sum-assured ratio is 8%, below 10%. The aggregate premium across all non-ULIP policies issued on or after 1 April 2023 is ₹1,20,000 — well below the ₹5,00,000 Finance Act 2023 threshold. The policy matures after 20 years with ₹26,00,000 (premium plus accumulated bonus and loyalty additions). The full ₹26,00,000 is exempt under Section 10(10D). No TDS, no tax in the hands of the policyholder.

Scenario 3 — Endowment Maturity, Aggregate Premium Above ₹5 Lakh

Same 35-year-old, same Scenario 2 endowment with ₹1,20,000 annual premium. In FY 2024-25, the same individual also buys a second endowment policy with sum assured ₹50,00,000 and annual premium ₹6,00,000 (well within the 10%-of-SA cap). Aggregate non-ULIP premium across post-April-2023 policies is ₹1,20,000 + ₹6,00,000 = ₹7,20,000, above the ₹5,00,000 threshold. The CBDT framework allows the assessee to elect that the first policy (with ₹1,20,000 annual premium) is within the ₹5 lakh exempt envelope and the second policy is outside it. Result — Scenario 2's first policy continues to be exempt under Section 10(10D); the second policy's maturity gains (maturity proceeds minus aggregate premium paid over the policy term) become taxable as income from other sources under Section 56 at the assessee's marginal slab in the maturity year.

Scenario 4 — High-Premium ULIP Issued After Feb 2021

A 40-year-old buys a single ULIP issued in April 2024 with annual premium ₹3,00,000 and sum assured ₹35,00,000 (premium-to-SA ratio 8.6%, within the 10% cap). Annual premium ₹3,00,000 is above the Finance Act 2021 threshold of ₹2,50,000 for ULIPs issued from 1 February 2021. Maturity gains (NAV at maturity minus aggregate premium paid, computed under Rule 8AD) are taxed as capital gains — long-term at 12.5% above the ₹1,25,000 annual exemption if the ULIP is equity-oriented, or 12.5% without indexation if non-equity. Section 80C deduction at premium stage continues to apply up to the 10%-of-SA cap and the ₹1.5 lakh basket — the maturity-side capital-gains treatment does not retrospectively unwind the deduction.

7. Surrender Proceeds and the Section 80C Reversal Interaction

Surrender proceeds under a life-insurance policy are also covered by Section 10(10D), subject to the same conditions that govern maturity. Where the surrender is within the lock-in period (2 years for non-ULIP life policies, 5 years for ULIPs), Section 80C(5) separately reverses earlier-year deductions. The two rules can therefore run in parallel — the surrender amount may itself be taxable under Section 10(10D) (because the premium-to-SA cap was breached) and the previously-claimed Section 80C deductions may be added back to the surrender-year's income.

In practice, very-early surrender of a life policy is one of the worst tax outcomes available to an Indian taxpayer — small or zero surrender value, full reversal of past deductions, and potentially a taxable surrender amount as well. Persistency, when the policy was bought after a careful sizing, is materially better than surrender almost every time.

8. Old vs New Regime — Section 10(10D) Is Regime-Neutral

Unlike Section 80C and Section 80D, Section 10(10D) is not a Chapter VI-A deduction. It is an exemption — the receipt is excluded from gross total income before any deduction logic begins. Section 10(10D) is therefore available under both the old regime and the new default regime under Section 115BAC, identically. A taxpayer on the new regime gets the full benefit of Section 10(10D) on every policy that meets its conditions, just as a taxpayer on the old regime does.

This is one of the few insurance-related tax provisions that does not depend on the regime choice. The 10%-of-sum-assured cap, the ULIP ₹2.5 lakh aggregate threshold, the non-ULIP ₹5 lakh aggregate threshold, and the death-benefit carve-out apply identically irrespective of which regime the assessee files under.

9. Common Misconceptions

Misconception 1 — 'All life-insurance maturity proceeds are tax-free.' This was approximately true before 1 February 2021 (subject to the 10%-of-SA cap). Post-2021, ULIPs above the ₹2.5 lakh aggregate threshold attract capital-gains tax. Post-1 April 2023, non-ULIP policies above the ₹5 lakh aggregate threshold are taxed as income from other sources. The headline statement is no longer reliable.

Misconception 2 — 'The ₹5 lakh threshold is per policy.' For non-ULIP life-insurance policies, the threshold is aggregate across all such policies issued on or after 1 April 2023, not per policy. A single ₹4 lakh policy is below the threshold; two policies of ₹3 lakh and ₹2.5 lakh together breach it. (For ULIPs, the ₹2.5 lakh threshold is similarly aggregate across all ULIPs issued on or after 1 February 2021.)

Misconception 3 — 'Death claims are taxable on the surviving spouse if the policy is large.' Death claims are fully exempt under Section 10(10D)(d), without reference to premium level, sum-assured ratio, issue date, or product structure. The surviving spouse / nominee receives the full death benefit free of tax, irrespective of policy size, with the sole exception of keyman insurance proceeds.

Misconception 4 — 'Section 10(10D) applies only under the old regime.' Section 10(10D) is an exemption, not a Chapter VI-A deduction, and is available under both the old and the new regime identically.

Misconception 5 — 'TDS under Section 194DA equals taxability.' TDS at 5% (on income component) under Section 194DA is deducted by the insurer when payouts cross ₹1,00,000 a year and the proceeds are not exempt under Section 10(10D). If the proceeds are eventually computed as exempt (e.g. on a re-evaluation of the 10%-of-SA test), the TDS can be claimed as a refund; conversely, the absence of TDS does not by itself prove tax-free status — the proceeds may be taxable but below the TDS threshold.

Practical Takeaways

1. For any non-ULIP life-insurance policy issued on or after 1 April 2023, monitor the aggregate annual premium across all such policies. Crossing ₹5,00,000 in a year converts the maturity proceeds of the elected policies from exempt to taxable as income from other sources.
2. For any ULIP issued on or after 1 February 2021, the analogous threshold is ₹2,50,000 of aggregate annual premium across all such ULIPs. Above that, maturity gains are taxed as capital gains under Sections 112 / 112A.
3. Pure-protection term insurance is unaffected by both thresholds because there are no maturity proceeds. The death benefit remains fully exempt under Section 10(10D)(d) under all conditions.
4. Always check the premium-to-sum-assured ratio against the 10%-of-SA cap (15% for severe disability or specified diseases). A breach of this cap independently breaks both Section 80C deduction (above the cap is non-deductible) and Section 10(10D) exemption (proceeds become fully taxable).
5. Section 10(10D) is regime-neutral. Whether you file under the old or the new regime, the same maturity-tax conditions apply; the regime choice only affects deductions, not exemptions.

Section 10(10D) used to be a one-line piece of trivia — 'life insurance maturity is tax-free' — and is now a multi-layered framework with separate rules for ULIPs and non-ULIPs, separate thresholds for issue dates, and separate treatment for death versus maturity. The death-benefit carve-out is the one thing that has not moved in fifty years and is the clearest reason pure-protection term insurance has stayed structurally simple from a tax perspective. For everything else — high-premium endowment, high-premium ULIP, savings-linked products bought after April 2023 — assume the maturity outcome is conditional, not unconditional, and run the premium thresholds before relying on tax-free maturity in any household plan.