Tax on Life Insurance in India: Section 10(10D), Maturity Proceeds, Surrender Value & ULIP Rules for AY 2026-27

Life insurance is one of the most widely held financial products in India — from traditional endowment and money-back policies to modern ULIPs. Most policyholders assume that whatever they receive from their insurer is completely tax-free. That was largely true until recently, but the rules have changed significantly for high-premium policies. If you receive a maturity payout, surrender value, or bonus from your life insurance in FY 2025-26, here is exactly how it gets taxed under current law.

Section 10(10D): The Core Tax Exemption

Under Section 10(10D) of the Income Tax Act, any sum received under a life insurance policy — including maturity proceeds, bonus, and the sum assured on death — is exempt from tax, provided certain conditions are met.

Conditions for Tax-Free Maturity (Non-ULIP Policies)

The exemption depends on when the policy was issued:

Example: Rajesh bought an endowment policy in 2018 with a sum assured of ₹15 lakh and annual premium of ₹1.2 lakh. Since ₹1.2 lakh is less than 10% of ₹15 lakh (₹1.5 lakh), his maturity proceeds will be fully tax-free under Section 10(10D).

The 2023 High-Premium Amendment

Starting with policies issued on or after 1 April 2023, a major change was introduced by the Finance Act 2023. If the aggregate annual premium paid across all your life insurance policies (excluding ULIPs) exceeds ₹5 lakh in any year, the maturity proceeds from those high-premium policies are taxable.

This doesn't affect your older policies — only policies issued from 1 April 2023 onward are counted. And among those, only policies where you breach the ₹5 lakh aggregate threshold lose the exemption.

Example: Priya has two policies issued in 2024:

• Policy A: annual premium ₹3 lakh
• Policy B: annual premium ₹3 lakh
• Total: ₹6 lakh (exceeds ₹5 lakh)

When these policies mature, the proceeds will not qualify for Section 10(10D) exemption. The income (maturity amount minus total premiums paid) will be taxed as "Income from Other Sources."

Important: The ₹5 lakh limit does not apply to policies issued before 1 April 2023, and death benefits remain fully tax-free regardless of premium amount.

How Taxable Maturity Proceeds Are Calculated

When your life insurance maturity does not qualify for Section 10(10D) exemption, the taxable amount is:

Taxable Income = Maturity Amount Received – Total Premiums Paid

This net income is reported under "Income from Other Sources" and taxed at your applicable slab rate.

Example: Suresh receives ₹18 lakh on maturity of a policy where he paid ₹12 lakh in total premiums over the policy term. His taxable income from the policy is ₹6 lakh (₹18 lakh – ₹12 lakh), added to his total income and taxed at his slab rate.

ULIP Taxation: A Different Set of Rules

Unit Linked Insurance Plans (ULIPs) follow separate taxation rules introduced by the Finance Act 2021. The distinction is based on annual premium:

ULIPs with Annual Premium ≤ ₹2.5 Lakh

If the annual premium on a ULIP does not exceed ₹2.5 lakh, the maturity proceeds are tax-free under Section 10(10D), provided the premium is within 10% of the sum assured (same as traditional policies).

ULIPs with Annual Premium > ₹2.5 Lakh (Issued After 1 February 2021)

For ULIPs issued on or after 1 February 2021 where the annual premium exceeds ₹2.5 lakh, the maturity proceeds are treated as capital gains — similar to equity mutual funds:

Example: Meera invested in a ULIP in March 2022 with an annual premium of ₹4 lakh. The policy matures in March 2027, returning ₹32 lakh against total premiums of ₹20 lakh. Her gain of ₹12 lakh is treated as LTCG. After the ₹1.25 lakh exemption, ₹10.75 lakh is taxed at 12.5% — approximately ₹1.34 lakh in tax.

This brought parity between ULIPs and equity mutual funds, closing a loophole that high-net-worth investors used to enjoy tax-free equity gains through ULIPs.

Tax on Surrender Value

If you surrender (cancel) a life insurance policy before maturity, the tax treatment depends on whether the surrender value would have qualified for Section 10(10D) exemption had the policy matured.

• If the premium condition is satisfied (premium ≤ 10% of sum assured, and aggregate premium ≤ ₹5 lakh for post-2023 policies): the surrender value is tax-free.
• If the premium condition is not satisfied: the net gain (surrender value minus premiums paid) is taxable as "Income from Other Sources."

For ULIPs with premium > ₹2.5 lakh, surrender proceeds are taxed as capital gains, same as maturity.

Surrender Before Completing Certain Years

Keep in mind that many policies have zero or very low surrender value in the first few years. Additionally, if you claim Section 80C deduction on premiums and then surrender within 2 years (for policies issued after 1 April 2012), the deductions already claimed may be reversed and added back to your income in the year of surrender.

TDS on Insurance Payouts: Section 194DA

The insurer deducts TDS at 5% on the taxable portion of insurance payouts under Section 194DA. Key points:

• TDS applies only when the maturity/surrender proceeds do not qualify for Section 10(10D) exemption
• TDS is calculated on the net income (payout minus premiums), not the full amount
• If total payout in a financial year is below ₹1 lakh, no TDS is deducted
• Death benefits are never subject to TDS

Example: If Suresh (from earlier) receives ₹18 lakh with ₹12 lakh in premiums paid, TDS is deducted on ₹6 lakh at 5% = ₹30,000. He receives ₹17.70 lakh and can claim credit for the ₹30,000 TDS when filing his ITR.

If your insurer has deducted TDS, it will reflect in your Form 26AS and Annual Information Statement (AIS). You can check your Form 26AS and AIS to verify TDS credits before filing.

Death Benefit: Always Tax-Free

Regardless of premium amount, policy type, or issue date, the sum assured paid on death of the policyholder is fully exempt under Section 10(10D). This applies to all policies — traditional, ULIP, term plans, and group insurance. No TDS is deducted, and the nominee does not need to report it as taxable income.

Reporting Life Insurance Income in Your ITR

If your life insurance payout is taxable, here is how to report it:

For Traditional Policies (Non-ULIP)

1. Report under "Income from Other Sources"
2. Show the net amount (maturity amount minus total premiums) as income
3. Claim TDS credit from Section 194DA deduction

For High-Premium ULIPs (Capital Gains)

1. Report under "Capital Gains" — as equity-oriented fund
2. Classify as STCG or LTCG based on holding period
3. Use ITR-2 (ITR-1 cannot handle capital gains)

If your only other income is salary and your life insurance maturity pushes you to ITR-2, 49Tax supports ITR-2 filing and can help you report capital gains correctly.

For Tax-Free Payouts

If the maturity proceeds are exempt under Section 10(10D), you are not required to show them in your ITR. However, the payout may appear in your AIS. If it does, you can report it under exempt income for completeness — this avoids potential mismatch queries from the department.

Quick Reference: Is My Life Insurance Payout Taxable?

Actionable Takeaway

Before your life insurance policy matures, check two things: (1) whether your annual premium exceeds 10% of the sum assured, and (2) for policies issued after April 2023, whether your aggregate premiums cross ₹5 lakh. If either condition is breached, plan for the tax liability — the insurer will deduct 5% TDS, but your actual tax could be higher depending on your slab. If you hold high-premium ULIPs, treat them like equity mutual funds for tax purposes and factor in the ₹1.25 lakh LTCG exemption. Keeping your Form 26AS and AIS handy during ITR filing ensures you don't miss TDS credits on insurance payouts.