What is Section 10(10D)?

Section 10(10D)^* of The Income Tax Act, 1961, is a legal provision that offers exemptions on benefits received under a life insurance policy. Under this section, any sum received from a life insurance policy, including bonuses, is exempt from tax subject conditions prescribed under them. This exemption extends to various life insurance claims, such as death benefits, maturity proceeds or surrender values.

Tax Exemption under Section 10(10D)

Below are a few things you should know about the Section 10(10D):

Life Insurance Policies Covered

Exemptions are available for various types of life insurance policies under Section 10(10D)*, including term insurance plans, endowment plans, Unit-Linked Insurance Plans (ULIPs) and others.

Moreover, both individual and group policies can be claimed under this section. Individuals, Hindu Undivided Families (HUFs), associations, trusts, companies, Bodies of Individuals (BOIs) and foreign companies are all eligible to claim the exemptions under this provision.

Maturity

Upon maturity of a life insurance policy, any amount received, including the maturity benefit and accrued bonuses are eligible for exemption under Section 10(10D)*, provided certain conditions are met.

Conditions for Exemption

To qualify for exemption under Section 10(10D)* of The Income Tax Act, 1961, you must adhere to specific premium payment limits based on the type and date of purchase of the life insurance policy. For ULIPs issued on or after February 1, 2021, the annual premium should not exceed ₹ 2.5 lakh throughout the policy term.

Policies obtained between April 1, 2003, and March 31, 2012, require the yearly premium to stay within 20% of the actual sum assured, while those acquired after April 1, 2012, must ensure the premium does not exceed 10% of the actual sum assured.

Additionally, for individuals fulfilling the criteria under Section 80U* or Section 80DDB*, the annual premium payment should not surpass 15% of the policy's insurance cover where the policy, issued on or after the 1st day of April, 2013

The Finance Act, 2023, amended section 10 (10D), of the Income Tax Act to remove the exemption available to the sum received from a life insurance policy in case the aggregate premium for non linked policies issued on or after the 1 April exceeds ₹ 5 lakh. That means, if the premium payable for more than one life insurance policy, issued on or after 1 April, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed ₹ 5 lakh for any of the previous years during the term of any of those policies.

Death Benefit

In the event of the policyholder's demise during the policy term, the amount received as a death benefit is eligible for exemption subject to the conditions prescribed under Section 10(10D) of The Income Tax Act, 1961. This provision ensures that your beneficiaries are not burdened with tax liabilities during a difficult period of loss and get to keep the entire sum for their use.

Exceptions

There are some exceptions to claiming tax benefits under Section 10(10D)*. These include amounts received under Keyman insurance policies, which are policies taken by an employer on the life of an employee for business purposes. Additionally, amounts received under specified sections of The Income Tax Act, 1961 related to disability may not qualify for tax exemption.

Eligibility for Deduction under Section 10(10D).

Below are the eligibility criteria to claim a deduction under Section 10(10D):

• Under Section 10(10D), policyholders can avail of the applicable tax benefits for life insurance policies of Indian and international life insurance companies.
• The provision offers tax deductions on money received from a life insurance policy, including maturity benefits, death benefits, and earned incentives.
• There is no restriction on the maximum value of the demand for life insurance coverage.
• On the payout within the Keyman Insurance Policy, there are no deductions.
• Budget 2021 introduced a key amendment under fourth proviso to Section 10(10D) that is applicable to Unit Linked Insurance Plans (ULIPs) that the policyholder can claim Section 10(10D) benefits only if the aggregate annual premium paid is below ₹2.50 Lakhs. This means if the individual holds one or more ULIPs, eligibility to claim this deduction is only available for the ULIP whose premium is under ₹ 2.5 lakhs per year.
• The Finance Act, 2023, amended Section 10 (10D), of the Income Tax Act to remove the exemption available to the sum received from a life insurance policy in case the aggregate premium for non linked policies policies issued on or after the 1 April exceeds ₹ 5 lakh. That means, if the premium payable for more than one life insurance policy, issued on or after 1 April, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed ₹ 5 lakh for any of the previous years during the term of any of those policies.

Do note, that the eligibility criteria to claim deduction under Section 10(10D) can be confusing if you are not aware of the rules. It is advisable to consult a financial advisor when it comes to understanding how and if you can claim a deduction under Section 10(10D) given the eligibility criteria set as per extant rules.

Policies Not Covered Under Section 10(10D)

Certain types of insurance policies do not qualify for tax benefits under Section 10(10D). This includes any payouts received under Keyman insurance policies. Additionally, benefits received by beneficiaries under Section 80DD(3)* or 80DDA(3)* of The Income Tax Act, 1961, are not exempted under Section 10(10D)*.

Premium Payment

Paying insurance premium on time and regularly is crucial for maintaining your plan's coverage and also for claiming tax deductions under Section 10(10D). Timely premium payments ensure that the policy remains active and your loved ones are financially protected in your absence. Failure to pay the premium on time may lead to policy lapses and jeopardise both the insurance coverage and your eligibility for tax deductions.

Conclusion

Maximising tax benefits on life insurance policies requires careful consideration and understanding of the provisions mentioned in Section 10(10D) of The Income Tax Act, 1961. You must meet the criteria, make sure to pay the premium on time and adhere to policy guidelines. Additionally, you should also understand the types of policies covered or excluded under Section 10(10D). The premium payment limits and the date of purchase can also impact your eligibility to avail exemption. Therefore, it is advised to always be up to date with the latest rules under Section 10(10D) of The Income Tax Act, 1961 to maximise tax benefits.