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.
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).
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.
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.
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.
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 5% on the income component (maturity amount minus total premiums paid), provided this income exceeds ₹1,00,000 in the year. If PAN is not furnished, TDS is deducted at 20%.
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.