Understanding life insurance maturity tax exemption has become more important than ever. Under Section 10(10D), life insurance maturity proceeds can be tax-free, but the exemption depends on the type of policy, when it was issued, and the premium paid.
The rules are particularly important for ULIPs and high-premium policies. For policies issued on or after April 1, 2023, other than ULIPs, the Section 10(10D) exemption generally does not apply if the premium payable in any year exceeds Rs 5 lakh. For ULIPs issued on or after February 1, 2021, a separate Rs 2.5 lakh premium limit applies.
This guide breaks down exactly what you need to know. Whether you hold a traditional endowment plan, a ULIP, or a term policy with a return of premium, you will find clear answers here. Most importantly, you will learn how the tax rules can affect your insurance and financial planning decisions.
What Are Life Insurance Maturity Proceeds?
When a life insurance policy completes its term and the policyholder is alive, the insurer may pay a lump sum. This amount is called the maturity proceeds. Depending on the policy, it may include the sum assured, accumulated bonuses, and other additions.
For many years, life insurance maturity proceeds generally enjoyed tax exemption under Section 10(10D) of the Income Tax Act. However, the rules have changed for certain high-premium policies. Not every policy qualifies for the exemption anymore.
Types of Policies That Pay Maturity Benefits
- Endowment plans: Combine insurance with savings and pay out on maturity or death.
- Money-back plans: Pay periodic survival benefits along with a final maturity amount.
- Unit Linked Insurance Plans (ULIPs): Market-linked plans where the fund value is paid on maturity.
- Term plans with return of premium: Refund eligible premiums if the policyholder survives the term.
- Whole life plans: Certain variants may provide benefits at a specified age or on maturity.
The tax treatment can differ based on the policy type, issue date, and premium amount. Therefore, identifying your policy type and issue date is the first step.
Life Insurance Maturity Tax Exemption Under Section 10(10D)
Section 10(10D) is the key provision that determines whether life insurance proceeds are exempt from tax. While many policies continue to qualify, amendments have introduced premium-based conditions for certain ULIPs and other life insurance policies.
The 2021 Amendment: ULIPs With High Premiums
For ULIPs issued on or after 1 February 2021, the Section 10(10D) exemption does not apply where the aggregate premium payable exceeds Rs 2.5 lakh in any financial year, subject to the applicable conditions. The taxable gains are generally treated as capital gains.
The 2023 Amendment: Traditional Policies With High Premiums
For life insurance policies other than ULIPs issued on or after 1 April 2023, the Section 10(10D) exemption does not apply where the aggregate premium payable exceeds Rs 5 lakh in any financial year, subject to the applicable conditions.
This Rs 5 lakh threshold applies to the aggregate premium across eligible policies issued on or after 1 April 2023, not simply to one individual policy.
Policies That May Continue to Enjoy Exemption
- Traditional life insurance policies issued on or after April 2023 where the applicable annual premium does not exceed Rs 5 lakh, subject to the Section 10(10D) conditions.
- ULIPs issued on or after February 2021 where the applicable premium does not exceed Rs 2.5 lakh, subject to the conditions.
- Eligible policies issued before these amendment dates, subject to the conditions applicable to those policies.
- Death benefits: Amounts received on the death of the insured generally remain exempt under Section 10(10D), subject to the applicable provisions.
- Keyman insurance policies and certain policies covered under Sections 80DD and 80DDB have separate tax rules.
New Tax Regime and Life Insurance: What Changes?
The new tax regime, now the default regime, removes most deductions and exemptions in exchange for lower tax rates. This has created confusion about how life insurance tax benefits are affected.
Section 80C Deduction for Premiums
Under the old tax regime, eligible life insurance premiums can qualify for deduction under Section 80C, subject to the overall Rs 1.5 lakh limit and applicable conditions. Under the new tax regime, this deduction is not available.
However, the taxability of maturity proceeds under Section 10(10D) is a separate matter. It does not depend on which tax regime you choose. Whether you opt for the old or new regime, the exemption for maturity proceeds is determined by the policy type, issue date, premium limits, and other conditions under Section 10(10D).
Practical Example: Raj’s Endowment Policy
Raj, a salaried professional in Mumbai, has an endowment policy issued in June 2022 with an annual premium of Rs 80,000. He has opted for the new tax regime for FY 2025-26.
- Since the policy was issued before April 2023, the premium-based restriction introduced in 2023 does not apply. The maturity proceeds may remain exempt under Section 10(10D), subject to the applicable conditions.
- However, Raj cannot claim the Rs 80,000 premium as a deduction under Section 80C because he is in the new tax regime.
- Net result: He benefits from the lower tax rates of the new regime but loses the 80C deduction on his premium.
Now consider a new endowment policy issued in August 2023 with an annual premium of Rs 6 lakh. Since the premium exceeds the applicable Rs 5 lakh threshold, the maturity proceeds would generally not qualify for exemption under Section 10(10D), subject to the other conditions. This treatment applies irrespective of whether the policyholder chooses the old or new tax regime.
How Are Taxable Maturity Proceeds Calculated?
If your policy does not qualify for the Section 10(10D) exemption, the taxable amount is generally based on the income component rather than the entire maturity amount. The tax treatment can vary depending on the policy type and applicable provisions.
Calculation Formula
Taxable Amount = Maturity Proceeds minus Total Premiums Paid (subject to applicable rules)
For example, if a policy matures at Rs 60 lakh and the policyholder has paid a total of Rs 42 lakh in premiums over seven years, the taxable income may be Rs 18 lakh. This amount is generally added to the taxpayer’s income and taxed according to the applicable rules.
TDS on Maturity Proceeds
Where life insurance proceeds are not exempt under Section 10(10D), the insurer may deduct TDS on the taxable income component, subject to the applicable threshold and tax rules. The TDS rate and threshold can depend on the nature and date of the policy. You can claim credit for the TDS while filing your ITR. If your actual tax liability is lower, you may be eligible for a refund.
Comparison Table: Tax Treatment of Different Policies
| Policy Type | Premium Threshold | Maturity Proceeds Tax Status | TDS Applicable? |
|---|---|---|---|
| Traditional policy (issued before April 2023) | Subject to applicable rules | Generally exempt under 10(10D), subject to conditions | No, if exempt |
| Traditional policy (issued from April 2023) | Up to Rs 5 lakh | Generally exempt under 10(10D), subject to conditions | No, if exempt |
| Traditional policy (issued from April 2023) | Above Rs 5 lakh | Generally taxable under applicable provisions | Yes, subject to TDS rules |
| ULIP | Up to Rs 2.5 lakh | Generally exempt under 10(10D), subject to conditions | No, if exempt |
| ULIP | Above Rs 2.5 lakh | Taxable as capital gains, subject to applicable rules | Yes, subject to TDS rules |
| Pure term plan (death benefit) | Any amount | Generally exempt as death benefit | No |
| Term with return of premium | Depends on policy and applicable conditions | Tax treatment depends on policy terms and Section 10(10D) conditions | Subject to applicable rules |
Key Mistakes to Avoid With Life Insurance and Taxes
Many investors make avoidable mistakes when it comes to life insurance and taxation. Most importantly, buying a policy purely for tax benefits, without considering whether it fits your overall financial plan, can lead to regret.
Mistake 1: Assuming All Policies Are Tax-Free
This is the most common error. As the rules above show, not every policy qualifies for the life insurance maturity tax exemption. Always check the policy’s issue date, premium threshold, and other applicable conditions before assuming the proceeds are tax-free.
Mistake 2: Ignoring the Impact of the New Tax Regime
If you have switched to the new tax regime, you no longer get the Section 80C benefit on eligible premiums. Yet many people continue paying high premiums on traditional policies without reassessing whether the overall financial and tax implications still work in their favour.
Mistake 3: Buying High-Premium Policies After April 2023 for Tax Savings
Buying a traditional life insurance policy issued after April 2023 with an annual premium above Rs 5 lakh specifically to build a large corpus may not be tax-efficient. The maturity proceeds may become taxable, and the overall returns may not justify the tax cost.
Mistake 4: Surrendering Existing Policies Prematurely
On the other hand, if you hold a policy issued before April 2023, its maturity proceeds may continue to qualify for exemption, subject to the applicable conditions. Surrendering such a policy early to reinvest elsewhere could mean giving up a valuable tax benefit. Think carefully before discontinuing any existing policy.
Mistake 5: Mixing Insurance and Investment Without a Plan
Traditional endowment and money-back plans combine insurance with savings. In many cases, the returns may be modest while the insurance cover may not be sufficient. The primary purpose of life insurance is financial protection for your family. Separating insurance from investment and evaluating both independently can lead to a stronger financial plan.
Smart Planning Tips for Life Insurance and Tax Efficiency in 2026
With the rules now clearer, here are practical steps you can take to stay tax-efficient with your life insurance holdings.
Review All Your Existing Policies
Make a list of all your life insurance policies, including the issue date, annual premium, and sum assured. Check which policies fall under the older rules and which are subject to the newer premium thresholds.
Keep Premiums Within the Exemption Threshold
If you are buying new traditional policies, keep the combined annual premium across eligible policies within the Rs 5 lakh threshold to retain the Section 10(10D) exemption, subject to applicable conditions. For ULIPs, the applicable premium threshold is Rs 2.5 lakh.
Choose the Right Tax Regime With Full Information
Evaluate your total deductions before choosing between the old and new tax regimes. If your major deductions are life insurance premiums and other Section 80C investments, the new regime’s lower slab rates may work better for you. However, the right choice depends on your specific income and outflows.
Use Term Insurance for Protection
A pure term plan can provide substantial financial protection at a relatively low premium. Death benefits under eligible term plans generally remain exempt under Section 10(10D), subject to applicable conditions. This is especially important for anyone with dependants.
Plan Surrenders and Maturities Carefully
If a policy’s proceeds are taxable, the tax impact will depend on the applicable rules and your overall income. Before surrendering or changing an existing policy, evaluate the financial and tax consequences carefully rather than making a decision based solely on tax savings.
Final Words
The rules around life insurance maturity tax exemption have become more nuanced with the new tax regime and the recent amendments. The key takeaways are simple. Eligible policies issued before the relevant amendment dates may retain their earlier exemption, subject to applicable conditions. New traditional policies with annual premiums above Rs 5 lakh may not qualify for exemption at maturity. Similarly, ULIPs exceeding the Rs 2.5 lakh premium threshold may not qualify for exemption under Section 10(10D). Switching to the new tax regime also means losing the Section 80C deduction on eligible premiums.
Understanding these distinctions is not complicated. However, applying them correctly to your specific situation requires looking at the full picture: your income, existing policies, financial goals, and chosen tax regime.
Frequently Asked Questions
1. Are life insurance maturity proceeds tax-free under the new tax regime?
The taxability of maturity proceeds depends on the policy type, issue date, premium, and other applicable conditions, not on whether you are in the old or new tax regime. If your policy qualifies for exemption under Section 10(10D), the maturity proceeds are generally tax-free in both regimes. However, under the new regime, you cannot claim the Section 80C deduction on eligible premiums.
Generally, no. Since your policy was issued before April 2023, the premium-based restriction introduced for policies issued from 1 April 2023 does not apply. The maturity proceeds may remain exempt under Section 10(10D), subject to the other applicable conditions.
For traditional life insurance policies issued on or after 1 April 2023, the aggregate annual premium threshold of Rs 5 lakh applies. If the combined premium exceeds this limit, the maturity proceeds may not qualify for exemption under Section 10(10D), subject to the applicable conditions.
4. Is TDS deducted on all life insurance maturity payments?
No. TDS is generally applicable only when the maturity proceeds are taxable under the applicable provisions, and the relevant threshold conditions are met. If the policy proceeds are fully exempt under Section 10(10D), TDS is generally not deducted.
Surrendering a policy has its own costs and financial implications. Before making any decision, evaluate the surrender value, remaining tenure, projected maturity amount, and applicable tax treatment. There is no universal answer. The right choice depends on your individual situation, and a financial review can help you decide.
Disclaimer
The information provided in this blog is for educational and informational purposes only and should not be construed as investment advice. Please consult a qualified financial advisor before making any investment decisions. Shashikant Chanderkumar Mudaliar (ARN: 319377), operating under the brand name VSJ FinMart, is an AMFI-registered Mutual Fund Distributor (MFD) and does not provide investment advisory services. Mutual fund investments are subject to market risks. Past performance is not indicative of future results. Please read all scheme-related documents carefully before investing. Registration details can be verified at www.amfiindia.com/locate-distributor.