Section 10(10D)
Section 10 (10D) is a section of Income tax act which makes the proceeds of Life Insurance policy tax free in the hands of policy holder. The promise of tax-free returns, under section 10(10D), is one of the key reasons that Life Insurance continues to be one of the most popular long-term savings tools. However, over the years there have been modifications made to section 10(10D) and therefore it is necessary that the customer understands the nuances to ensure that they are purchasing the right kind of policy
Section 10(10D) What is section 10(10D)
Exceptions to section 10(10D)
How best to use section 10(10D)
What is section 10(10D)
Section 10(10D) under income tax allows the proceeds from a life insurance policy, whether in shape of bonus, moneyback, maturity or death, to be tax free for the policyholder. This is the simple one-line interpretation. However, there are a few things you need to keep in mind
1. Death Claim amount that comes from a life insurance policy is always tax exempt under section 10(10D).
2. For life insurance endowment policies, both ULIP and traditional which have savings components, the proceeds are tax free subject to following dates and conditions.
3. For all endowment policies bought between April 1, 2003, and March 31, 2012 the sum assured should be 5 times the Annual premium of the policy for them to qualify for tax free status under 10(10D).
4. For all endowment policies bought after March 31, 2012 the sum assured should be 10 times the Annual premium for them to qualify for tax free status under 10(10D).
5. For ULIP policies purchased on or after Feb 1, 2021 section 10(10D) will apply only up to premium limit of 2.5 lac per individual. The ULIP policies that a policyholder has above this limit will not qualify for tax free status under 10(10D) and will be charged as per the capital gains tax laws prevalent at the time.
6. For all non ULIP endowment policies bought on or after April 2023, section 10(10D) mandates the upper cap on premium at Rs 5 lac. Any non ULIP endowment policy bought after the said date and premiums above 5 lacs will be charged as per the capital gains tax laws prevalent at the time.
7. The premium limits set on ULIP and non ULIP endowments will operate irrespective of number of policies. Hence even if the customer has multiple policies purchased after the said date and all of whom are below the premium limit, for tax calculation purpose all such policies will be summed up.
8. The limits on premium and sum assured multiple apply only from the dates mentioned. Policies bought before the said dates are not impacted.
Exceptions to section 80 D
1. Keyman Insurance Policy doesn’t qualify for exemption under section 10(10D). Keyman Insurance policy is a policy that a company takes on lives of its senior employees to protect itself from financial loss.
2. Proceeds and benefits from Pension and annuity plans. Since these plans sold by life insurance companies don’t have any protection component, don’t quality for tax exemption under section 10(10D).
3. Any policy for which tax benefit has been claimed at the time of contribution under section 80DD (B) does not qualify under section 10(10D).
How to best use section 10(10D)
1. In case you have policies which are older than 2003, please make sure that your paperwork and details are correct. Prior to 2003 there was no specific sum assured limit and hence if you have those policies, we advise that you continue those policies till maturity to reap the most benefit.
2. Section 10(10D) allows for partial withdrawal i.e. partial surrender of cash value built in your policy in a tax-free manner. This is a great advantage which makes life insurance endowment a great savings tool. However, you must understand how withdrawals impact the sum assured in your policy. If at any point in the lifetime of a policy, and that can run into decades, the sum assured multiple falls below the recommended limit, your policy benefits can lose their tax-free status. Please make sure that you understand this clearly from your best term insurance company and then plan for partial withdrawals
3. Given the new limits placed on tax free status of maturity, it makes sense for a policy holder to purchase multiple policies, if he/she so desires, on name of his/her family members. For example, in a family of 4 (Husband, wife and two kids) the family can purchase 4 ULIP policies of 2.5 lac each and since the ownership of no single person is above 2.5 lac, all the 4 policies will qualify for tax rebate. This is a great savings tool and used by many people. However, you must note that rights over the policy do not belong to the person paying for the policy (payor) but the owner of the policy (proposer). Hence this step should be taken after due consideration.
Section 10(10D) is a great tool to encourage the citizens of India to both protect their present as well as future. The tax-free status has encouraged millions of Indians to invest in Life Insurance. However, in order to fully benefit from this, it is necessary to understand how it functions. Hope this article has been of some help in that regard.
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