Is life insurance maturity taxable in India? Life insurance maturity proceeds are exempt under Section 10(10D) if the annual premium does not exceed 10% of the sum assured (policies issued on or after 1 April 2012) or 20% (policies issued 1 April 2003 to 31 March 2012). For non-ULIP policies issued on or after 1 April 2023, the aggregate annual premium must also not exceed Rs 5 lakh. If the exemption conditions are not met, the income component (maturity minus premiums paid) is taxable, and TDS at 2% (5% before 1 October 2024) applies under Section 194DA when the payout in the year is Rs 1,00,000 or more.
Most policyholders assume that any amount received on maturity of a life insurance policy is completely tax-free. That assumption holds true only when the policy meets strict conditions laid down under Section 10(10D) of the Income Tax Act. If the annual premium crosses the prescribed percentage of sum assured, the maturity proceeds become taxable, and the insurance company deducts TDS under Section 194DA before releasing the payout.
This guide covers the exact conditions for exemption, how TDS is computed, and the special rules for ULIPs, keyman policies, and surrender payouts. All thresholds and rates discussed here are current for FY 2025-26 (AY 2026-27) and continue under the Income Tax Act 2025.
Section 10(10D): When Maturity Proceeds Are Exempt
Section 10(10D) of the Income Tax Act grants a blanket exemption to any sum received under a life insurance policy, including bonuses. However, this exemption is conditional on the relationship between annual premium and sum assured.
The conditions differ based on when the policy was issued (death claims are exempt in every case):
| Policy issued | Condition for exemption |
|---|---|
| 1 April 2003 to 31 March 2012 | Annual premium not more than 20% of the actual sum assured |
| 1 April 2012 to 31 March 2013 | Annual premium not more than 10% of the actual sum assured |
| On or after 1 April 2013 | 10% limit; 15% if the insured is a person with disability (Section 80U) or has a specified disease (Section 80DDB) |
| ULIPs issued on or after 1 February 2021 | Above premium ratio test, plus aggregate annual premium on all such ULIPs not more than Rs 2.5 lakh |
| Non-ULIP policies issued on or after 1 April 2023 | Above premium ratio test, plus aggregate annual premium on all such policies not more than Rs 5 lakh |
Keyman insurance policies never qualify. Under the Income-tax Act, 2025 (from tax year 2026-27) the same conditions sit in Schedule II, Table Sl. No. 2.
How the Premium-to-Sum-Assured Test Works
Consider a policy issued in 2015 with a sum assured of Rs 10,00,000. For the maturity proceeds to remain exempt, the annual premium must not exceed Rs 1,00,000 (10% of Rs 10,00,000). If the actual annual premium is Rs 1,20,000, the condition fails and the income component of the maturity payout (amount received minus premiums paid) becomes taxable.
Key points to note:
- The percentage test applies to each policy independently. Only the separate Rs 2.5 lakh (ULIP, from 1 February 2021) and Rs 5 lakh (non-ULIP, from 1 April 2023) limits aggregate premiums across policies.
- Bonuses are irrelevant to the test. If the sum assured is Rs 10 lakh and the insurer adds Rs 3 lakh in bonuses over the policy tenure, the test still checks premium against the original Rs 10 lakh sum assured.
Death Benefit: Always Tax-Free
Regardless of the premium amount or policy vintage, any sum received by the nominee or legal heir on the death of the insured person is fully exempt under Section 10(10D). No TDS is deducted on death claims.
Section 194DA: TDS on Non-Exempt Maturity Payouts
When the maturity proceeds of a life insurance policy do not qualify for exemption under Section 10(10D), the insurance company is required to deduct TDS under Section 194DA before releasing the payment.
For the 2% rate, how to get the deducted amount refunded through your ITR and how to avoid the deduction in the first place, see our detailed guide on Section 194DA TDS on life insurance maturity.
How TDS Under 194DA Is Calculated
The critical distinction: TDS is levied only on the income component, not on the gross maturity amount.
Income component = Maturity proceeds (including bonus) minus total premiums paid over the policy tenure.
Example:
A non-ULIP policy issued in May 2023 carries an annual premium of Rs 6 lakh, so it fails the Rs 5 lakh aggregate test. Total premiums paid are Rs 30,00,000 and the maturity payout with bonus is Rs 38,00,000.
| Particulars | Amount |
|---|---|
| Maturity payout (with bonus) | Rs 38,00,000 |
| Less: total premiums paid | Rs 30,00,000 |
| Income component | Rs 8,00,000 |
| TDS under 194DA at 2% | Rs 16,000 |
The Rs 8,00,000 is taxed as income from other sources at your slab rate, and the Rs 16,000 TDS is claimed as credit in your ITR.
Key 194DA Rules
- TDS rate: 2% on the income component from 1 October 2024 (Finance (No. 2) Act 2024 reduced it from 5%; the 5% rate on the income component had applied from 1 September 2019).
- Threshold: No TDS if the aggregate sum paid to the policyholder in a financial year is less than Rs 1,00,000.
- No PAN penalty: If the policyholder does not furnish PAN to the insurer, TDS is deducted at 20% instead of 2%.
- TDS certificate: The insurer issues Form 16A. The TDS is reflected in Form 26AS and the Annual Information Statement (AIS).
- Final tax liability: TDS is not the final tax. The income component is added to your total income and taxed at your slab rate. The TDS already deducted is available as credit.
ULIP Special Rules: Finance Act 2021 Changes
Unit-Linked Insurance Plans (ULIPs) received a separate tax treatment from FY 2021-22 onwards:
- ULIPs issued on or after 1 February 2021 with annual premium exceeding Rs 2.5 lakh (aggregate across all such ULIPs) are not eligible for Section 10(10D) exemption.
- Maturity or redemption proceeds of such ULIPs are taxed as capital gains under Section 112A (long-term) or 111A (short-term), similar to equity mutual funds.
- The Rs 2.5 lakh threshold is checked across all ULIPs issued on or after 1 February 2021 in aggregate, not per policy.
- ULIPs issued before 1 February 2021 continue to be governed by the standard 10(10D) rules (10% premium limit).
- Long-term gains (units held more than 12 months) above Rs 1.25 lakh are taxed at 12.5%, and short-term gains at 20%, for transfers on or after 23 July 2024.
- Death proceeds remain exempt.
Practical impact: If you hold a single ULIP with annual premium of Rs 3 lakh (issued after February 2021), its maturity proceeds are taxed as capital gains even if the premium is under 10% of sum assured. Section 10(10D) simply does not apply.
For the ITR side of this, including reporting ULIP gains in ITR 2, see our ULIP tax guide for AY 2026-27 under Section 10(10D).
Keyman Insurance: No Exemption
Keyman insurance policies (taken by a company or firm on the life of a key employee or partner) are explicitly excluded from Section 10(10D). The entire maturity amount received under a keyman policy is taxable as business income or income from other sources, depending on the recipient's status at the time of receipt.
If the policy was originally taken as keyman insurance but later assigned to the insured individual, the proceeds may still be treated as taxable. The tax treatment depends on whether consideration was paid for the assignment and the nature of the payout.
Surrender Before Maturity
If you surrender a life insurance policy before the completion of its tenure:
- The surrender value received is tested against the same Section 10(10D) conditions. If the annual premium exceeded the prescribed limit, the income component is taxable.
- For policies surrendered within the first 2-3 years, many insurers pay only a nominal surrender value (or nothing at all), and the premium-to-sum-assured ratio may still be within limits, making the small payout exempt.
- TDS under Section 194DA applies to surrender payouts in the same manner as maturity payouts: 2% on the income component, if the total paid in the year is Rs 1,00,000 or more.
How to Report in Your ITR
The reporting requirement depends on whether the maturity is exempt or taxable:
- Exempt maturity: report the amount in Schedule EI (exempt income) of your ITR.
- Taxable (non-ULIP): report the income component in Schedule OS (income from other sources) and claim the 194DA TDS from Form 26AS / AIS.
- Taxable ULIP: report the gain in Schedule CG as capital gains.
Even when the maturity is fully exempt, many taxpayers skip Schedule EI reporting. This omission can trigger a mismatch notice from the Income Tax Department because the insurer reports the payout in your AIS.
Common Mistakes to Watch For
- Assuming all maturity proceeds are tax-free. Check the premium-to-sum-assured ratio before treating the amount as exempt.
- Ignoring ULIP reclassification. Post-2021 ULIPs with high premiums follow capital gains rules, not the 10(10D) framework.
- Not reporting exempt income. Schedule EI disclosure is mandatory even for tax-free maturity payouts.
- Confusing TDS with final tax. The 2% TDS under 194DA is an advance collection. Your actual tax liability on the income component depends on your slab rate.
- Overlooking keyman policy exclusion. Companies sometimes treat keyman maturity payouts as exempt. They are not.
- Forgetting PAN submission to insurer. Without PAN, TDS rises from 2% to 20%.
This post is based on Section 10(10D) and Section 194DA of the Income Tax Act 1961, the Finance Act 2012, the Finance Act 2021, the Finance Act 2023, the Finance (No. 2) Act 2024 and Schedule II of the Income-tax Act 2025. Provisions under the Income Tax Act 2025 carry forward the same substantive rules. Tax law changes periodically. Verify current provisions before making financial decisions.
Frequently Asked Questions
What is the current TDS rate under Section 194DA on a taxable maturity payout?
Since 1 October 2024, the insurer deducts TDS at 2% under Section 194DA, reduced from the earlier 5%. TDS applies only to the income component, meaning the payout minus total premiums paid, and only when the total payout in the year is Rs 1 lakh or more. If you have not given your PAN, TDS is 20%.
Are traditional policies with high premiums bought after April 2023 still tax-free?
Not fully. For non-ULIP life insurance policies issued on or after 1 April 2023, maturity proceeds are exempt only if the aggregate annual premium across such policies does not exceed Rs 5 lakh. Above that, the amount received in excess of premiums paid is taxable as income from other sources at slab rates. Death benefits remain exempt regardless of premium.
Is the amount my family receives on my death ever taxable?
No. Any sum received on the death of the insured person is exempt under Section 10(10D), whatever the premium, policy type or date of issue. The insurer does not deduct TDS on death claims. The nominee should still keep the claim settlement letter in case the payout shows up in the annual information statement and needs explaining.
How is a ULIP bought after February 2021 taxed if my premium is above Rs 2.5 lakh?
If the aggregate annual premium on ULIPs issued on or after 1 February 2021 exceeds Rs 2.5 lakh, the 10(10D) exemption does not apply to those policies. Equity-oriented ULIPs are then taxed like equity mutual funds: long-term gains above Rs 1.25 lakh at 12.5% and short-term gains at 20%. Death proceeds stay exempt.
Is TDS under 194DA the final tax on my maturity amount?
No. TDS is only an advance payment. The taxable income component is added to your income under other sources and taxed at your slab rate, and the TDS shown in Form 26AS and AIS is claimed as credit in your ITR. If your slab rate is higher than the TDS rate, you pay the balance; if lower, you get a refund.
Should I report an exempt maturity amount in my ITR?
Yes. Show the exempt maturity amount in the exempt income schedule of your return. Insurers report payouts to the tax department, so leaving an exempt receipt out can create a mismatch against your AIS and prompt a query. Keep the policy document showing the sum assured and premium so you can prove the exemption conditions were met.
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Sources
- Section 10(10D), Income Tax Act 1961 (exemption for life insurance proceeds)
- Section 194DA, Income Tax Act 1961 (TDS on life insurance payouts)
- Finance Act 2012 (revision of premium limit from 20% to 10% for post-2012 policies)
- Finance Act 2021, Section 112A read with Section 10(10D) proviso (ULIP capital gains treatment)
- Finance Act 2023 (Rs 5 lakh aggregate premium limit for non-ULIP policies issued on or after 1 April 2023)
- Finance (No. 2) Act 2024 (194DA TDS rate cut from 5% to 2%, effective 1 October 2024)
- Income Tax Act 2025 (continuation of similar provisions under new code)
