Section 10(10D) life insurance maturity exemption: the 10% premium-to-sum-assured rule and the Rs 5 lakh annual-premium ULIP/non-ULIP cap

For decades, the Indian saver treated life insurance maturity proceeds as a sacred tax-free pot. That assumption no longer holds. Section 10(10D) of the Income Tax Act 1961 still exempts most maturity sums and survival benefits, but a tightening sequence of conditions — the 10% premium-to-sum-assured cap from 1 April 2012, the Rs 2.5 lakh ULIP aggregate-premium ceiling from 1 February 2021, and the Rs 5 lakh non-ULIP ceiling from 1 April 2023 — now decides who walks away tax-free and who books a notice from the assessing officer. The maturity cheque looks identical in both cases; only the Form 26AS entry separates them.

This piece walks through the layered test that the assessing officer applies when a maturity claim hits your bank account, the carve-outs for disability and specified illnesses, and the two distinct tax regimes (capital gains for excess ULIPs, "Income from Other Sources" for excess non-ULIPs) that decide the final outflow. Every figure below is sourced from the Income Tax Act 1961 and the relevant Finance Act amendments; nothing is paraphrased.

The Rule / Product

Section 10(10D), inserted into the Income Tax Act 1961 and amended through the Finance Acts 2003, 2012, 2021 and 2023, exempts "any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy". The exemption is layered chronologically by the date the policy was issued, and each layer adds a fresh condition.

For policies issued between 1 April 2003 and 31 March 2012, the premium payable in any year of the policy must not exceed 20% of the actual sum assured. For policies issued on or after 1 April 2012, that ratio tightens to 10% under Section 10(10D)(c). The 10% cap is relaxed to 15% only where the insured is a person with disability under Section 80U or suffering from a disease specified under Section 80DDB; this carve-out was added by Finance Act 2013 and applies to policies issued on or after 1 April 2013.

For unit-linked insurance plans (ULIPs) issued on or after 1 February 2021, Finance Act 2021 added Section 10(10D) Provisos 4 to 7. If the aggregate premium payable across all ULIPs held by the taxpayer exceeds Rs 2,50,000 in any previous year during the policy term, the exemption is denied. The taxable portion is treated as capital gains under Section 112A read with the new Section 45(1B), which means the long-term capital gains rate of 10% applied for transfers up to 22 July 2024 (above the Rs 1 lakh threshold), and 12.5% (above the Rs 1.25 lakh threshold) for transfers on or after 23 July 2024 following Finance (No. 2) Act 2024.

For non-ULIP (traditional endowment, money-back, par and non-par savings) policies issued on or after 1 April 2023, Finance Act 2023 inserted Section 10(10D) Proviso 6 and Section 56(2)(xiii) of the Income Tax Act. If the aggregate premium across all such policies exceeds Rs 5,00,000 in any previous year, only the policy with the lowest premium (chosen by the taxpayer per CBDT Circular 15/2023 dated 16 August 2023) retains the exemption; the rest are taxed as "Income from Other Sources" net of premiums already paid out of taxed income.

Death benefits remain fully exempt under Section 10(10D)(d) regardless of any premium-to-sum-assured ratio or annual premium cap. Keyman insurance policies, defined in Explanation 1 to Section 10(10D), have never qualified for exemption since the 1996 amendment.

Why It Matters

If you bought a Rs 50 lakh endowment in April 2024 with an annual premium of Rs 6 lakh, you have just sailed past the Rs 5 lakh non-ULIP cap. The maturity sum, say Rs 90 lakh after 15 years, will not arrive tax-free. You will owe slab-rate tax on the excess of maturity over total premiums paid, and the insurer is required by Section 194DA to deduct 5% TDS on the income component once the gross payout crosses Rs 1 lakh.

The same Rs 6 lakh annual premium splits very differently between a ULIP and a traditional plan. A ULIP triggers capital gains taxation at 12.5% on the gain above Rs 1.25 lakh from 23 July 2024 onwards, and a long-term holding qualification kicks in only after 12 months under Section 2(42A) Proviso. A traditional plan, by contrast, pulls the gain into your slab rate, which can be 30% plus 4% cess plus surcharge for high-income taxpayers, and the holding period gives no relief.

The Rs 5 lakh non-ULIP threshold is also an aggregate. If you already pay Rs 3.5 lakh towards an LIC endowment and add a Rs 2 lakh private-insurer savings plan in the same financial year, both bought after 1 April 2023, the cap is breached at Rs 5.5 lakh. CBDT Circular 15/2023 permits you to pick which policy retains the Section 10(10D) shield, and the others lose it permanently for that vintage.

The Section 80C deduction available on the same premium under Section 80C(3A) is itself subject to the 10% ratio cap for policies issued from 1 April 2012; if your premium exceeds 10% of the actual sum assured, the deduction is restricted to 10% of sum assured. So a Rs 1 lakh premium on a Rs 5 lakh policy permits only Rs 50,000 as 80C deduction, and full Section 10(10D) exemption is denied at maturity.

Worked Numbers

Consider Anita, a 35-year-old Mumbai resident, comparing three identical-looking life insurance purchases on 1 April 2024.

In Scenario C, suppose the ULIP matures on 5 April 2034 at a fund value of Rs 55 lakh. Total premiums paid: Rs 30 lakh. Gain: Rs 25 lakh. Because the policy was issued after 1 February 2021 and the annual premium of Rs 3 lakh breached the Rs 2.5 lakh ceiling, Section 10(10D) is denied. The gain is treated as long-term capital gain under Section 112A read with Section 45(1B). At the post-23-July-2024 rate of 12.5%, the tax is 12.5% of (Rs 25,00,000 minus Rs 1,25,000), which is Rs 2,96,875, plus 4% health and education cess of Rs 11,875, totalling Rs 3,08,750. Anita's drag on the gain is 12.35%.

Now flip to Scenario B (the endowment) but raise the annual premium to Rs 5,40,000 from policy year two. The maturity sum in 2044 is Rs 95 lakh. Total premium paid: Rs 1,07,40,000 (Rs 4.8 lakh year 1 plus Rs 5.4 lakh times 19 years). Section 56(2)(xiii) catches this: the entire maturity is "Income from Other Sources" net of premiums paid out of taxed income. The taxable income on these figures would be Rs (95,00,000 minus 1,07,40,000), a negative number, so no addition arises in this loss case but the exemption credit is still lost. If maturity had instead been Rs 1.5 crore on premiums of Rs 1.07 crore, the Rs 42,60,000 income would be taxed at slab; for a 30% bracket plus 4% cess assessee, that is Rs 13,29,120 of tax against Rs 5,32,500 of LTCG charge if the same gain had sat in a ULIP. The product structure decides the headline rate.

Anita can model the same purchase on the Oquilia term insurance premium calculator and the ULIP vs mutual fund calculator before signing, to see where the Rs 2.5 lakh and Rs 5 lakh ceilings start to bite.

Pitfalls

The first trap is the bundled-family-rider problem. If you, your spouse and a minor child each hold post-April-2023 endowments paying Rs 2 lakh, Rs 2 lakh and Rs 1.5 lakh respectively, you might think you are under the Rs 5 lakh ceiling. But Section 56(2)(xiii) tests the cap per taxpayer, and the minor's premium is clubbed under Section 64(1A) with the parent. The household-effective cap collapses to Rs 5 lakh on the parent's return when policies are funded from the parent's account.

The second trap is the late top-up. Adding a rider mid-term that raises the annual premium above 10% of the base sum assured, for a policy issued after 1 April 2012, voids Section 10(10D) prospectively for that policy year onwards. CBDT has consistently held in assessment practice that the 10% test is applied year by year, and a single year of breach taints the entire maturity exemption.

The third trap is the ULIP-to-traditional swap. Insurers offer policy alteration under the IRDAI (Linked Insurance Products) Regulations 2019 and the 2024 IRDAI Master Circular. A ULIP issued on 1 March 2021 that is converted to a non-linked endowment in 2026 retains its original issuance date for Section 10(10D) testing. The Rs 2.5 lakh ULIP cap continues to apply even though the policy is no longer linked.

The fourth trap is non-resident assignment. If you, an Indian resident, assign a policy to a non-resident relative under Section 38 of the Insurance Act 1938, the maturity in the assignee's hands attracts Section 195 TDS at 20% plus surcharge on any income component, and DTAA relief operates only at the residual stage rather than at TDS withholding. The IRDAI 2024 free-look period directive does not override the tax consequence of assignment.

The fifth trap is partial withdrawals from a ULIP after the fifth policy year. The withdrawal itself is technically exempt under Section 10(10D)(c) Proviso, but the cumulative premium of the policy is still tested for the 10% ratio in every subsequent year.

For continuity-of-coverage rules that interact with payout disputes, see Oquilia's Health Insurance Moratorium 60 Months explainer and the IRDAI claim settlement TAT note. For the underlying definition of sum assured, the Section 80C deduction mechanics, and long-term capital gains treatment, the glossary entries set the baseline.

FAQ

Does Section 10(10D) apply differently under the new tax regime?

No. Section 10(10D) sits in Chapter III of the Income Tax Act 1961, which lists incomes that do not form part of total income. It applies identically under both the old regime and the new regime under Section 115BAC. Only the Chapter VIA deductions (such as Section 80C and 80D) are restricted in the new regime, and Section 80CCD(1B) NPS deduction is not allowed in the new regime at all; the Section 10(10D) maturity exemption itself is regime-neutral.

What if my policy was issued before 1 April 2003?

Policies issued on or before 31 March 2003 carry an unconditional Section 10(10D) exemption regardless of premium-to-sum-assured ratio, ULIP cap or non-ULIP aggregate. The Finance Act 2003 amendment is prospective.

Is the Rs 2.5 lakh ULIP cap per policy or aggregate?

Aggregate. Section 10(10D) Proviso 5 specifies the aggregate of premium payable for any of the previous years during the term of all such ULIPs. Two ULIPs of Rs 1.5 lakh and Rs 1.5 lakh in the same financial year breach the Rs 2.5 lakh cap collectively, even if neither breaches it alone.

Does the cap apply to my old ULIP if I top it up in 2026?

The original issuance date governs. A ULIP issued before 1 February 2021 stays outside the Rs 2.5 lakh ULIP cap even if topped up later, provided the 10% premium-to-sum-assured ratio is maintained year by year. Only the original-issuance date drives Provisos 4 to 7 of Section 10(10D).

How is the LTCG computed on a taxable ULIP maturity?

The cost of acquisition is the aggregate premium paid; indexation is not available, since Section 112A is a flat-rate regime. For transfers up to 22 July 2024, the rate was 10% on gains exceeding Rs 1 lakh in aggregate across all Section 112A assets; from 23 July 2024, the rate is 12.5% on gains exceeding Rs 1.25 lakh, following Finance (No. 2) Act 2024.

Can I claim Section 80C deduction on premium that breached the Rs 5 lakh non-ULIP cap?

Section 80C(3A) caps the deduction at 10% of the actual sum assured for policies issued on or after 1 April 2012. The Rs 5 lakh non-ULIP threshold does not directly cap 80C, but the overall Section 80C ceiling of Rs 1.5 lakh and the 10% ratio together restrict it. Maturity tax under Section 56(2)(xiii) is a separate event from the year-of-premium deduction. See the Oquilia Section 80C glossary entry for the deduction mechanics.

What documentary proof do I need to claim the exemption on maturity?

The insurer reports the payout in Form 26AS linked to your PAN. If the payout is exempt, the insurer typically reports it under Section 194DA with zero TDS once the income component is below the Rs 1 lakh trigger. Retain the policy document, premium receipts, and the maturity computation sheet from the insurer; the assessing officer can ask for sum-assured proof to verify the 10% test.