The primary reason for most policyholders buying life insurance is to offer financial protection to their loved ones. However, a life insurance policy can also help you with saving taxes if you have opted for the old tax regime. A common way to save taxes with life insurance is under Section 80C. The policyholder can claim an exemption for the premiums they pay into the policy. Another way to save taxes is using Section 10 (10D) of the Income Tax Act. This can be especially useful for the nominee. This section allows the nominee/ beneficiary of the policy to enjoy tax-free payouts from the plan under specific conditions.
Key Exemption under Section 10 (10D)
Let’s begin with understanding the focal point of Section 10 (10D), i.e., the key tax benefit it provides.
As per Section 10 (10D), the benefits received from a life insurance policy are exempted from taxation. This applies whether the payout is made to the policyholder (on maturity or surrender of the policy) or to the nominee (in case of the policyholder’s demise). This means that the money you or your nominee receives from the life insurance policy will not be considered taxable income. Bonuses are also included in this benefit.
However, to enjoy these life insurance tax benefits, the insurance policy must meet the eligibility criteria set by Section 10 (10D).
Eligibility Criteria for Section 10 (10D) Tax Benefits
To be eligible for the benefits under Section 10 (10D), the policy must meet the following conditions:
For policies issued after 1st April 2012, the annual premium should not exceed 10% of the sum assured to be eligible for exemptions.
For policies issued between 1st April 2003 and before 31st March 2012, the annual premium should not exceed 20% of the sum assured.
If the policy is issued on or after 1st April 2013 and provides a life cover to an individual with a disability (as described in Section 80U) or a person suffering from critical illnesses (as specified in Section 80DDB), the premium limit is set at 15% of the sum assured.
The taxation for Unit-linked Insurance Plans (ULIPs) can differ. The maturity proceeds from a ULIP policy issued on or after 1st February 2021 are tax-free only if the total premium (paid in a year) is ₹2.5 lakh or less. This limit also applies if an individual holds more than one ULIP, where the aggregate premium of all the policies should not exceed such limits.
For life insurance plans other than ULIPs issued on or after 1st April 2023, the total premiums paid (for one or more policies) should not exceed ₹5 lakhs.
Regardless of premium limits or the date of issue, the death benefit received by the nominee is always tax-free under Section 10 (10D).
Resident Indians as well as non-resident Indians (NRIs) are eligible for this benefit.
Section 10 (10D) life insurance benefit is eligible for taxpayers under the old and the new tax regime.
Example of Tax Benefits under Section 10 (10D)
Let’s take a look at a few examples to better understand this benefit.
Mr. Gaurav buys a ULIP in June 2020 with a sum assured of ₹75 lakhs. He pays an annual premium of ₹50,000 towards the plan. As per existing rules under Section 10 (10D), the maturity proceeds from his ULIP are tax-free, since the annual premium is less than 10% of the sum assured.
Suppose Nalini buys a term life insurance policy in May 2023 and pays an annual premium of ₹4 lakh. In January 2024, Nalini buys another term insurance policy for which she pays ₹2 lakhs as annual premiums. Since the combined premium exceeds ₹5 lakh, the maturity amount may become taxable, unless the payout is due to the insured’s demise.
Benefits of Section 10 (10D) Exemption
By claiming the exemption stated under Section 10 (10D) of the Income Tax Act, you can enjoy the following benefits:
Tax-Free Maturity Benefit
With Section 10 (10D), the amount you receive on policy maturity, including bonuses, is tax-free, as long as your policy meets the eligibility criteria. This allows you to create a solid corpus for your loved ones (and yourself) without worries about incurring tax liability.
Full Exemption on the Death Benefit
The benefit paid to the nominee in case of the insured’s demise is fully exempt from tax under Section 10 (10D). This ensures your family gets the full benefit of your life insurance plans.
Helps in Financial Planning
Knowing that the death benefit your loved ones may receive, or the maturity benefit you may get from your life insurance policy will factor into tax exemptions can help you with future planning. You can rest assured that if your policy falls under the purview of Section 10 (10D), you may be able to incorporate it into your financial planning.
Applies to All Life Insurance Plans
Whether you are opting for a long-term investment plan via a ULIP or securing your family’s future with a term plan, you can enjoy this benefit, as long as you meet the terms and conditions.
Other Life Insurance Tax Benefits
Along with the exemption under Section 10 (10D), buying life insurance makes you eligible for another major tax benefit.
Prevailing tax laws allow you to claim a tax deduction of up to ₹1.5 lakhs against the premiums you pay for your life insurance policy under Section 80C. The ₹1.5 lakhs amount is the upper limit for deductions against all instruments listed under Section 80C, which can include Public Provident Fund, tax-saver fixed deposits, National Pension Scheme, and more.
Hence, if you have a life insurance policy, make sure to include Section 80C and Section 10 (10D) benefits when you file ITR.
While Section 10(10D) benefits are applicable to all those who are eligible, it is recommended to consult a tax expert before proceeding. As each person’s financial situation is different, their eligibility for tax benefits under existing laws may also vary. It is also advisable to be updated with changes in tax laws as it may affect your eligibility for certain benefits.
** Tax exemptions are as per applicable tax laws from time to time.
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