Taxation of Life Insurance Policies (Other than ULIP and Keyman Policies)
- tax comply
- May 16
- 3 min read
Introduction: Life insurance is often seen as a dual-purpose financial tool: it provides protection for your family and offers various tax benefits. But with evolving tax regulations, especially post-April 2023, understanding the tax treatment of life insurance maturity proceeds is critical. This article simplifies the tax rules surrounding life insurance policies, particularly those excluding ULIP (Unit Linked Insurance Plans) and Keyman Insurance Policies.
1. Tax Exemption under Section 10(10D)
Section 10(10D) of the Income Tax Act allows for tax exemption on any sum received under a life insurance policy, including bonuses. However, this exemption is subject to certain conditions:
1.1 Eligibility Conditions for Exemption:
The policy must not be a ULIP or Keyman Policy.
The premium paid in any year during the policy term should not exceed:
10% of the sum assured (for policies issued on or after April 1, 2012)
15% of the sum assured (in case of a person with a disability or specified disease)
New Rule (Effective April 1, 2023): If the annual premium exceeds INR 5,00,000, the maturity amount becomes taxable, unless it is received on the death of the policyholder.
1.2 Exemptions Continue to Apply When:
The policy is a term insurance plan (even if the premium is over INR 5 lakhs).
The policy proceeds are received due to the death of the insured.
The policy is issued by an IFSC (International Financial Services Centre) insurer, regardless of premium.
2. Taxation on High-Premium Life Insurance Policies
The Finance Act, 2023, introduced a limit of INR 5 lakhs per annum for tax-free treatment. Two new conditions were added:
2.1 Single Policy:
If the premium of a single policy (issued on or after April 1, 2023) exceeds INR 5 lakhs in any year, the maturity proceeds are fully taxable.
2.2 Multiple Policies:
If an individual owns multiple policies issued after April 1, 2023, and the aggregate premium exceeds INR 5 lakhs in any year, only policies within the limit will qualify for exemption.
You can choose which policies to claim exemption for—ideally the ones with higher maturity or yield.
Examples:
Policy A (₹4L premium), Policy B (₹2L), Policy C (₹6L): Total = ₹12L
Only Policy A & B will be eligible for 10(10D) exemption
3. Tax Calculation for Non-Exempt Policies
If a policy doesn't qualify under Section 10(10D), the proceeds are taxed as "Income from Other Sources" under Section 56(2)(xiii).
3.1 Taxable Amount =
Total payout (including bonus) - Total premiums paid (excluding those claimed under Section 80C) = Taxable Income
3.2 Example:
Policy premium: ₹7L/year for 10 years = ₹70L
Deduction claimed under Section 80C: ₹15L
Maturity Amount: ₹1 Cr
Taxable Income = ₹1 Cr - (70L - 15L) = ₹45L
This amount is taxed at your applicable income slab rate.
4. Deduction under Section 80C
Life insurance premiums qualify for deduction under Section 80C up to ₹1.5L per year.
Conditions:
Deduction is allowed only if the premium is not more than:
10% of the sum assured (policy issued after April 1, 2012)
15% for disabled individuals or those with critical illnesses
If the policy lapses (i.e., discontinued within 2 years), previously claimed deductions become taxable.
5. TDS (Tax Deducted at Source)
If the maturity amount is not exempt, the insurer deducts TDS at 2% (under Section 194DA) on the taxable portion of the payout.
For example, if the total maturity is ₹10L and ₹7L is premium paid, then TDS will be on ₹3L.
For non-residents, TDS is applied under Section 195 as per the applicable DTAA rates.
6. Reset of ₹5 Lakh Limit for New Policies
If you purchase a new policy after the existing policy's premium payment term ends, the ₹5L limit resets. The new policy is evaluated independently.
This helps individuals plan their insurance in phases to manage tax impact.
Frequently Asked Questions (FAQ)
Q1: Are all life insurance payouts tax-free?
No. Only payouts that meet certain conditions under Section 10(10D) are tax-free. Others may be taxable.
Q2: What happens if I pay more than ₹5 lakh in premium per year?
If your policy is issued after April 1, 2023, and the annual premium exceeds ₹5 lakhs, the maturity amount is taxable unless received on death.
Q3: Is TDS applicable on all life insurance maturity payouts?
No. TDS at 2% is applicable only if the payout is taxable under Section 194DA.
Q4: Can I claim deduction under 80C for high-premium policies?
Yes, up to ₹1.5 lakhs per year, provided the premium is within specified percentage of sum assured.
Q5: How can I structure policies to optimize tax benefits?
Stagger policies over time and keep premiums under ₹5 lakh/year per life cycle to stay eligible for exemption.
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