Last Updated on January 9, 2024 by Umer Malik
A life insurance policy works as a cushion of assurance amidst future uncertainties. However, staying informed of the tax implications of a life insurance policy is recommended. learn how section 10 (10D) impacts your life insurance maturity amount.
Section 80C of the Income Tax Act, 1961 is not the only provision that can be used to reduce one’s tax burden in a life insurance policy. There’s another part under the Income Tax Act, of 1961 that offers tax advantages against payments made. This is Section 10 (10D) of the Income Tax Act, 1961 which provides exemption on the sum assured and accrued bonus (if any) received through life insurance policy claim on maturity or death as a benefit.
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How does Section 10 (10D) determine taxation at maturity?
For ease of understanding, let’s only discuss ULIPs or unit-linked insurance plans here, as well as typical insurance products like endowment and money-back plans. These insurance-cumulative investment plans offer survivor benefits at maturity which do not apply to pure-term life insurance.
It should also be noted that there is a huge difference between the death benefit and survival benefit. While death benefits are paid out in case the individual holding the policy passes away before the completion of the policy term, maturity benefits are paid out if the policyholder survives the term.
Keeping the above points in mind, let us check what Section 10(10D) covers in terms of ULIP tax benefits
The Finance Act, 2021 amended section 10 (10D) of the IT Act to provide that no exemption shall be available to any unit linked insurance policy (ULIP) issued on or after 1 February 2021 if the amount of premium payable in any given year during the policy term exceeds Rs. 2,50,000. The Amended fifth proviso to section 10 (10D) of the Act states that in case of multiple ULIPs issued on or after 1 February 2021, exemption under section 10 (10D) shall be available only to those policies whose aggregate premium whereof does not exceed Rs. 2, 50,000 for any of the previous years during the term of any of the policies.
If a person purchases a policy and pays an annual premium higher than 10 per cent of the sum assured of the policy, the maturity benefits of the policy are taxable. For insurance policies bought after 1st April 2012, there is a 10% restriction. The regulation barrier for ULIPs purchased prior to this date is 20% of the total insured.
Amendment to Section 10 (10D) of the Budget 2021 for High Premium ULIPs
The Budget 2021 made a significant change to Section 10(10D) of the Income Tax Act, 1961 by including a fourth provision that applies to Unit Linked Insurance Plans (ULIPs) with high annual premiums. According to the new change, if one has purchased the policy after 1st February 2021 and paid INR 2.5 lakhs or more as a premium for the policy in a financial year, the amount received (including the bonus) at the time of maturity will be taxable.
A fifth provision was added in the Budget statement to address the situation where a single individual paid premium for several ULIPs. In such circumstances, of more than one ULIP is granted on or after 1st February 2021, the total premium paid for all plans must be less than 2.5 lakhs to qualify for the tax exemption under Section 10(10D).
It is hardly unexpected that most people have long used insurance as a tax planning ploy. The main objective of these benefits is, however, to encourage more individuals to buy insurance policies.
It is recommended that you thoroughly understand all of the tax advantages offered by the different provisions of the Income Tax Act of 1961. It is usually beneficial to compare different term life insurance plans, understand their components, benefits, additions, limits, and other terms & conditions, and then make an informed choice based on your needs and financial goals.