Tax on Life Insurance Maturity Proceeds: Section 10(10D) Rules Explained
Most people assume life insurance payouts are always tax-free. That used to be largely true - but a series of amendments since 2012 mean many policies, especially high-premium and ULIP plans, now attract tax on maturity. Here's how to know where you stand.
The General Rule Under Section 10(10D)
Section 10(10D) of the Income Tax Act exempts sums received under a life insurance policy - including bonus amounts - from tax, subject to certain conditions. This covers both maturity proceeds (when the policy term ends and you're alive) and death benefit proceeds (paid to nominees on the death of the insured).
The Premium-to-Sum-Assured Ratio Test
For maturity proceeds to remain exempt, the premium paid in any year must not exceed a specified percentage of the sum assured. These limits have changed over time based on when the policy was issued:
| Policy Issue Date | Maximum Premium as % of Sum Assured (any year) |
|---|---|
| On or before 31 March 2003 | No specific limit under 10(10D) (pre-amendment) |
| 1 April 2003 to 31 March 2012 | 20% of sum assured |
| On or after 1 April 2012 | 10% of sum assured |
| Policies for persons with disability/specified disease (Section 80U/80DDB) | 15% of sum assured |
If the premium paid in any year exceeds these limits, the entire maturity proceeds (not just the excess) become taxable - unless the policy also meets the newer ULIP/high-premium carve-outs described below.
ULIP Rules: Policies Issued On or After 1 February 2021
For Unit Linked Insurance Plans (ULIPs) issued on or after 1 February 2021, maturity proceeds are taxable as capital gains if the annual premium exceeds ₹2,50,000 in any policy year. If you hold multiple ULIPs, this limit applies to the aggregate premium across all such ULIPs issued on or after that date.
Gains on such taxable ULIPs are treated like equity-oriented mutual fund units for capital gains purposes - subject to short-term or long-term capital gains tax depending on the holding period, with applicable STT.
Non-ULIP Policies Issued On or After 1 April 2023
For traditional (non-ULIP) life insurance policies issued on or after 1 April 2023, maturity proceeds are taxable if the total annual premium across all such policies exceeds ₹5,00,000 in any year. If the aggregate premium crosses this limit, the maturity proceeds from policies whose premium contributed to crossing the threshold become taxable as "Income from Other Sources", though the income (i.e., maturity amount minus total premiums paid) is what is taxed, not the gross receipt.
TDS Under Section 194DA
When a taxable maturity payout is made (i.e., the policy does not qualify for the 10(10D) exemption), the insurer deducts TDS under Section 194DA at 2% on the income component (maturity amount minus total premiums paid), subject to the current statutory no-TDS threshold for the payout. If PAN is not furnished, TDS is deducted at 20%.
How to Check If Your Policy Is Exempt
- Check the policy issuance date and compare the annual premium to the sum assured using the ratio table above.
- For ULIPs issued after 1 February 2021, check if your annual premium (across all such ULIPs) exceeds ₹2.5 lakh.
- For traditional policies issued after 1 April 2023, check if your total annual premium across all such policies exceeds ₹5 lakh.
- Review your insurer's annual premium statement and the maturity advice - insurers are required to indicate whether TDS under 194DA applies.
What If Maturity Proceeds Are Taxable?
If your policy fails the exemption tests, the taxable amount is generally the maturity proceeds minus the total premiums paid (i.e., the gain), not the full payout. For ULIPs post-Feb-2021 that fail the test, this gain is taxed under capital gains rules; for traditional policies post-April-2023, it is taxed as income from other sources at slab rates.
2026 current-law quick reference
What changes the answer?
| What to check | What to do | Common mistake to avoid |
|---|---|---|
| Core classification | Where a life-insurance payout is taxable and section 194DA applies, the current TDS rate is 2% on the income component, subject to the statutory no-TDS threshold; the payout’s ultimate taxability still depends on section 10(10D) conditions. | Do not decide from the label used on an invoice, agreement or bank narration alone. |
| Edge case | TDS is not the final tax. Death benefits and different issue-date/premium thresholds require separate exemption checks. | Recompute when the fact pattern crosses this boundary. |
| Evidence | Reconcile the documents below to the tax/regulatory return before filing. | A correct legal rule with an unreconciled evidence trail can still fail in assessment or audit. |
| Effective date | Apply the law/form/rate for the actual transaction, tax year or proceeding date. | Do not mix FY 2025–26/AY 2026–27 legacy references with post-1-April-2026 forms. |
Worked practical example
A taxable policy pays ₹8 lakh after ₹6.5 lakh premiums. Test 10(10D) first; if taxable and TDS applies, the insurer deducts on the income component—not the full payout.
Evidence checklist
- policy schedule
- issue date
- premium history
- sum assured
- insurer TDS certificate
Primary-source checks: Income Tax Department — TDS rates · Income Tax Department current law/transition
How to use this: This current-law summary reflects the latest position. Where it conflicts with an older rate, threshold, form or section reference elsewhere on the page, rely on the current, dated primary source above.
Frequently Asked Questions
Source and review trail
Use the current official instrument, portal or regulator publication before acting. This panel separates the category authority from page-specific references.
- Primary category
- Income Tax
- Official starting point
- www.incometax.gov.in
Page source links
The prior page did not embed a page-specific external source. The category authority above is the minimum verification starting point; a specific instrument should be added when available.
Primary sources & related provisions
Statutory provisions referenced in this guide: