Key Takeaways
- Life insurance maturity proceeds are exempt from tax under Section 10(10D) if the annual premium does not exceed 10% of the sum assured (for policies issued on or after 1 April 2012). For older policies, the limit is 20%.
- Death benefit is always 100% tax-free under Section 10(10D), regardless of the premium-to-sum-assured ratio.
- If the exemption conditions are not met, the insurer deducts TDS at 5% under Section 194DA on the income component (maturity amount minus total premiums paid), not on the full payout.
- TDS under 194DA applies only when the aggregate payout in a financial year exceeds Rs 1,00,000. If PAN is not furnished, TDS jumps to 20%.
- ULIPs with annual premium exceeding Rs 2.5 lakh (policies issued on or after 1 February 2021) are taxed as capital gains, not under Section 10(10D).
- Keyman insurance policies are always fully taxable. Section 10(10D) does not cover them.
- Even exempt maturity proceeds must be reported in Schedule EI (Exempt Income) of the ITR.
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% (pre-2012 policies). If the exemption conditions are not met, the income component (maturity minus premiums paid) is taxable, and TDS at 5% applies under Section 194DA when the payout exceeds Rs 1,00,000.
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.
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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:
Comparison
Section 10(10D) Exemption: Pre-2012 vs Post-2012 Policies
Premium-to-sum-assured ratio test for maturity exemption
| Parameter | Policy Issued Before 1 April 2012 | Policy Issued On or After 1 April 2012 |
|---|---|---|
| Premium Limit for Exemption | Annual premium must not exceed 20% of sum assured | Annual premium must not exceed 10% of sum assured |
| Disabled / Severe Disease (80U/80DDB) | 20% limit applies (same as general rule) | 15% of sum assured (relaxed from 10%) |
| Death Benefit | Always 100% exempt, no conditions | Always 100% exempt, no conditions |
| Bonus / Loyalty Additions | Bonuses increase maturity value; do not affect the premium ratio test | Same treatment: bonuses do not change the ratio test |
| Result If Limit Exceeded | Entire maturity amount is taxable; TDS under 194DA applies | Entire maturity amount is taxable; TDS under 194DA applies |
| Keyman Insurance | Always fully taxable; 10(10D) does not apply | Always fully taxable; 10(10D) does not apply |
Takeaway: Post-2012 policies face a stricter 10% cap. Before buying any policy, verify that the sum assured is at least 10x the annual premium to protect the tax-free status of the maturity payout.
Source: Section 10(10D), Income Tax Act 1961; Finance Act 2012; CBDT Circular 03/2013
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 entire maturity payout becomes taxable.
Key points to note:
- The test applies to each policy independently. Holding multiple policies does not aggregate premiums for this test.
- 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.
- Riders (accident, critical illness) premiums are generally excluded from the premium computation if they are separately identifiable.
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.
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:
| Component | Amount |
|---|---|
| Maturity amount received | Rs 15,00,000 |
| Total premiums paid over 20 years | Rs 12,00,000 |
| Income component (taxable) | Rs 3,00,000 |
| TDS at 5% on income component | Rs 15,000 |
| Net payout after TDS | Rs 14,85,000 |
Key 194DA Rules
- TDS rate: 5% on the income component (raised from 2% by Budget 2019 amendment, effective from 1 September 2019).
- Threshold: TDS applies only if the aggregate payout in a financial year exceeds Rs 1,00,000. Below this threshold, no TDS is deducted.
- No PAN penalty: If the policyholder does not furnish PAN to the insurer, TDS is deducted at 20% instead of 5%.
- 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.
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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).
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.
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, on the income component exceeding Rs 1,00,000.
How to Report in Your ITR
The reporting requirement depends on whether the maturity is exempt or taxable:
| Scenario | Where to Report in ITR |
|---|---|
| Exempt maturity (Section 10(10D) conditions met) | Schedule EI (Exempt Income). Report the full maturity amount. |
| Taxable maturity (conditions not met, standard policy) | "Income from Other Sources." Income component = maturity minus premiums paid. |
| ULIP capital gains (post-Feb 2021, premium > Rs 2.5 lakh) | Schedule CG (Capital Gains). LTCG under Section 112A or STCG under 111A. |
| TDS deducted under 194DA | Verify in Form 26AS/AIS. Claim credit in the relevant schedule. |
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.
Looking for expert help with ITR filing for insurance maturity? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.
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 5% 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 doubles from 5% to 20%.
Frequently Asked Questions
Is life insurance maturity amount taxable in India?
It depends on the premium-to-sum-assured ratio. If the annual premium does not exceed 10% of sum assured (for policies issued on or after 1 April 2012) or 20% (pre-2012 policies), the maturity proceeds are fully exempt under Section 10(10D). If the limit is exceeded, the income component (maturity minus total premiums paid) is taxable.
What is TDS rate on life insurance maturity under Section 194DA?
TDS is deducted at 5% on the income component (maturity amount minus total premiums paid) when the payout does not qualify for Section 10(10D) exemption and the aggregate amount exceeds Rs 1,00,000 in a financial year. If PAN is not furnished, TDS is 20%.
Is the death benefit from a life insurance policy taxable?
No. The death benefit is always 100% exempt under Section 10(10D), regardless of the premium amount or sum assured. No TDS is deducted on death claims.
How are ULIPs taxed on maturity after Finance Act 2021?
ULIPs issued on or after 1 February 2021 with aggregate annual premium exceeding Rs 2.5 lakh across all such ULIPs are taxed as capital gains (LTCG under Section 112A or STCG under 111A). Section 10(10D) exemption does not apply to them.
Do I need to report exempt life insurance maturity in ITR?
Yes. Even if the maturity is fully exempt under Section 10(10D), you must disclose the amount in Schedule EI (Exempt Income) of your ITR. The insurer reports the payout in your Annual Information Statement (AIS), so omitting it can trigger a mismatch notice.
Is keyman insurance maturity exempt from tax?
No. Keyman insurance is explicitly excluded from Section 10(10D). The entire maturity amount is taxable as business income or income from other sources, depending on the recipient's status.
What happens if I surrender my life insurance policy early?
The surrender value is tested against the same Section 10(10D) conditions. If the annual premium exceeded the prescribed limit, the income component (surrender value minus premiums paid) is taxable. TDS under 194DA applies on the income component exceeding Rs 1,00,000.
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, CBDT Circular 03/2013, and Budget 2019 amendments. Provisions under the Income Tax Act 2025 carry forward the same substantive rules. Tax law changes periodically. Verify current provisions with a qualified professional before making financial decisions.
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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)
- CBDT Circular No. 03/2013 dated 26 February 2013 (clarification on 10% premium limit)
- Budget 2019 amendment (194DA TDS rate increase from 2% to 5%, effective 1 September 2019)
- Income Tax Act 2025 (continuation of similar provisions under new code)