Tax Exemption on Life Insurance Policy under Section 10(10D)

Section 10(10D): Tax Exemption on Maturity Amount of Life Insurance Policy

As per Section 10(10D) of the Income Tax Act, 1961, any sum received under a Life Insurance Policy, including the sum allocated by way of bonus on such policy is exempt from tax whether received from India or any Foreign Company. However, this rule does not apply to the following amounts:

• sum received under Section 80DD(3) or 80DDA(3), or
• any sum received under a Keyman Insurance Policy, or
• any sum received other than as death benefit under an insurance policy which has been issued on or after April 1, 2003, and if the premium paid in any of the years during the term of the policy is more than 20% of the Actual Capital Sum Assured.
• The Finance Bill, 2012 has proposed that the exemption under Section 10 (10D), on benefits you receive under life insurance policies issued on or after 1st April 2012, shall be available only if the premium payable in any of the years is not more than 10% of the Sum Insured.

Provided that the provisions of this subclause shall not apply to any sum received on the death of a person; Provided further that for the purpose of calculating the actual capital sum assured under this subclause effect shall be given to the Explanation to sub-sec (3) of sec 80C or the Explanation to sub-sec (2A) of section 88 as the case may be.

Points to Ponder

1. For the purpose of calculating the actual capital sum assured, the following shall not be taken into the account:
   the value of any premiums agreed to be returned; or
   any benefit by way of bonus or otherwise, over and above the sum actually assured, which is to be or may be received under the policy by any person.
2. Any amount received from the Foreign Life insurance company is also eligible for deduction. [Refer: ITA No.549/Mum/2010 (Asst Year 2006-07).]
3. Keyman insurance policy means a life insurance policy taken by a person on the life of another person who is connected to the business as an employee or other capacities, either in the present or in the past.
4. It may be noted that while computing the amount taxable out of the maturity proceeds, the premium paid by the assessee shall be excluded – Circular No. 7/2003 dated 05.09.20013.

Let’s takes the example: Sanyam, an actor, has taken a life insurance policy for Rs. 1 crore. He has paid a sum of Rs. 50 lakhs, Rs. 20 lakhs, Rs. 20 lakhs and Rs. 10 lakhs as premium over the life of insurance policy. A sum of Rs. 1.10 crore has been received during 2012-13 from the insurance company at the time of maturity of the policy.

Tax Treatment: Exemption under section 10(10D) is not available to Sanyam as the premium paid in one of the years exceeds 20% (now 10%) of the life insurance sum assured. Accordingly, the amount of income accruing on such policy, not including the premium paid shall be subject to tax. In the given case, Rs.10 lakhs being Rs. 1.10 crore minus Rs. 1 crore shall be subjected to tax under section 10(10D).

TDS on Life Insurance Policy Maturity Amount

Since there was no TDS, many taxpayers used to avoid the tax by not disclosing it in the income tax return. To overcome this issue Finance Minister in Budget 2014 has inserted a new section 194DA under which TDS of 1% (changed in Budget 2016 from 2% to 1%) would be deducted by the insurer on the proceeds of life insurance policy (for both unit-linked insurance plans and traditional plans), if the premium paid by assessee exceeds 10% of the sum assured in any financial year. The deduction will be made on the entire amount including any sum allocated by the way of bonus.

However, no TDS shall be deducted if the amount receivable from the insurance company is below ₹ 1,00,000 but the assessee is required to pay the tax under “Income from Other Sources” if the same is not covered under an exemption under Section 10(10D).

Sum received on the death of the insured is still not taxable.