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Introduction:

In today’s era of inflation, life insurance provides your loved ones with vital financial security. A life insurance policy enables your family members to pursue various plans such as education, marriage, home loan payments even in their absence In case of unfortunate death of the policyholder, the nominated life insurance policyholder will get guaranteed funds.

Life insurance policies also offer many tax advantages, allowing beneficiaries to claim the entire sum insured. Section 10(10D) of the Income Tax Act provides for tax exemptions on insurance policy, maturities and bonuses. In this blog, we will provide detailed knowledge on this section.

Section 10(10D): 

While life insurance policies are primarily recognized for providing financial stability during medical emergencies, they also offer two benefits. You can get tax benefits and exemptions along with financial protection. For example, any claim or remuneration (if applicable) received under Section 10(10D) of the Income Tax Act is exempt from tax. This exemption applies regardless of whether the amount is paid out upon the insured’s death, policy surrender, or maturity.

Benefits of Section 10 (10D):

Life insurance or term insurance offers financial protection for a designated duration, ensuring that in the event of the policyholder’s demise within this timeframe, the insurance company disburses the full sum assured to the nominated beneficiary.

Section 10(10D) protects against tax credits and corresponding remuneration received by the plan holder and their nominees. In addition, late payments received by the policyholder at the end of the period are also exempt from taxation under this section.

Exemptions under Section 10(10D):

• The tax benefits available under Section 10(10D) of the Income Tax Act, 1961 include:
• For policies purchased on or after April 1, 2012, to qualify for tax exemptions, the premium payable must not exceed 10% of the insurance amount.
• To qualify for the 10(10D) tax exemption, the total premiums paid in any fiscal year during the policy period for life insurance policies purchased between April 1, 2003 and March 31, 2012 must not exceed cash 20% of the coverage
• If the policyholder is disabled or suffers from diseases, the premium for any one year shall not exceed 15% of the guaranteed amount;
• The diseases falling under this category (as specified in the third entry) are specified under Section 80U of the Income Tax Act.
• The diseases eligible for tax exemption should be clearly outlined in Section 80DDB of the Income Tax Act.

TDS on Life Insurance Policy:

For policies not covered by Section 10(10D), if the amount received from the insurance policy exceeds ₹1 lakh, the insurance company will deduct 1% TDS before the payout. No TDS will be deducted if the amount is below ₹1 lakh. While the amount is taxable, you can claim a refund for the TDS deducted when filing your Income Tax Returns.

Tax on a Single Premium Policy:

The maturity amount received from a single-premium insurance plan for a one-term policy is not exempt from tax under Section 10(10D). However, it can become tax-free only if the minimum sum assured is at least 10 times the single premium amount paid.

Eligibility Under Section 10 (10D):

• To qualify for the tax exemption under Section 10(10D) of the Income Tax Act, the following conditions need to be fulfilled.
• All claims from life insurance policies qualify for tax deductions.
• There is no limit on the maximum value of the life insurance coverage demand.
• The premium or monthly payment in any year during the term of the policy may not exceed 20% of the sum insured for the policy purchased between April 1, 2003 and March 31, 2012;
• The premiums for life insurance policies purchased on or after April 1, 2012, cannot exceed 10% of the sum insured.
• No tax deductions apply to payouts within the Keyman Insurance Policy.
• The provision provides tax deductions on funds received from a life insurance policy, encompassing maturity benefits, death benefits, and earned incentives.
• Under Section 10(10D), policyholders can access the relevant tax benefits for life insurance policies offered by both Indian and international insurance companies.

Requirements for Maturity Returns Under Section 10(10D):

• To avail tax benefits under this Section, maturity payouts must meet the following conditions:
• Payments are not applicable to policies issued under Section 80DD(3) of the IT Act.
• The payment should not pertain to a pension or annuity plan.
• The premium for each year shall not exceed 20% of the amount guaranteed on a policy of insurance purchased between April 1, 2003 and April 30, 2012;
• The premium in any year cannot exceed 15% of the amount guaranteed for the insurance policy. The card must be purchased on or after April 1, 2013, and must be for the following people. Severely disabled or disabled person as defined in section 80U. A person suffering from any disease or illness in accordance with section 80DDB.

Deduction Limit :

Claim payouts and bonuses from all types of insurance are eligible for tax deductions under Section 10(10D) of the Income Tax Act. However, if all applicable conditions are met, there is no upper limit for tax deductions under this section.

Functionality of Section 10(10D):

Section 10(10D) operates comprehensively. If you hold a qualifying insurance policy and receive maturity proceeds from it, those proceeds are exempt from income tax. This exemption aims to incentivize individuals to invest in insurance policies, securing their financial future without facing additional taxation burdens.

Final Word:

Undoubtedly, insurance policies have served as tax-saving instruments for numerous individuals throughout the years. The principal objective of Section 10(10D) of the Income Tax Act is to incentivize individuals to acquire life insurance policies to safeguard their loved ones. Nonetheless, it’s crucial to comprehend the policy terms and exceptions thoroughly before making a decision.