How Section 10(10D) Can Help You Save on Taxes

Section 10(10D) of the Income Tax Act, 1961 is a crucial provision in India that allows taxpayers to save on taxes related to the maturity proceeds of life insurance policies. Here’s how it can help you save taxes and what you need to know:

1. Tax-Free Insurance Payouts

Under Section 10(10D), any sum received under a life insurance policy, including bonuses on such policy, is exempt from taxation. This includes payouts received:

  • On policy maturity
  • On surrender of the policy
  • As death benefits to the nominee

The exemption applies to policies issued on or after April 1, 2003, provided they meet certain conditions.

2. Conditions for Exemption

The tax exemption under Section 10(10D) is applicable if:

  • Premium does not exceed 10% of the sum assured for policies issued after April 1, 2012.
  • Premium does not exceed 20% of the sum assured for policies issued between April 1, 2003, and March 31, 2012.
  • Death benefits received by the nominee are always tax-exempt, irrespective of the premium paid or the sum assured.

If the premium exceeds the stipulated percentage of the sum assured, the exemption under Section 10(10D) will not be applicable, and the payout may be taxed.

3. Applicability to ULIPs

Unit Linked Insurance Plans (ULIPs) are also covered under Section 10(10D). However, for ULIPs purchased on or after February 1, 2021, where the aggregate annual premium exceeds ₹2.5 lakh, the maturity proceeds are not eligible for the tax exemption under Section 10(10D). In such cases, the capital gains tax may apply on ULIP returns.

4. TDS on Insurance Payouts

If the payout under a life insurance policy is taxable (i.e., it doesn’t meet the conditions of Section 10(10D)), Tax Deducted at Source (TDS) at the rate of 5% on the income component (difference between the payout and the premiums paid) will apply under Section 194DA.

5. Bonuses are Tax-Free

If your life insurance policy has declared bonuses, these too are exempt from tax under Section 10(10D), provided the policy meets the eligibility criteria. This ensures that your policy benefits, including any accrued bonuses, remain fully tax-free.

6. Key Benefits of Section 10(10D)

  • No Tax on Maturity Proceeds: If your policy qualifies, the entire maturity payout is tax-free, ensuring you receive the full benefit of your investment.
  • Tax-Free Death Benefits: The death benefits payable to your nominee under the policy are always tax-free.
  • No Upper Limit: There is no maximum limit on the amount that can be claimed as exempt under Section 10(10D), provided the conditions are satisfied.
  • Long-Term Savings Tool: By choosing policies that qualify for the 10(10D) exemption, you can grow your investments without worrying about tax erosion at the time of maturity.

7. Exclusions from Section 10(10D)

The exemption under Section 10(10D) is not applicable in the following cases:

  • Policies where the premium exceeds the sum assured thresholds (10% or 20%, as applicable).
  • Payouts received under Keyman Insurance policies (policies taken by an employer on the life of an employee for the employer’s benefit).
  • Any insurance policy taken after April 1, 2003, that does not comply with the specified premium-to-sum-assured ratio.

Conclusion

Section 10(10D) offers a valuable way to save on taxes by ensuring that the maturity proceeds of eligible life insurance policies, as well as death benefits, are tax-exempt. By choosing life insurance policies that meet the premium-to-sum assured requirements, you can maximize your tax savings while ensuring financial protection for your family or yourself. Always consult with a tax advisor to ensure your life insurance policies are structured in a tax-efficient manner under this section.

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