Section 10 (10D) of the Income Tax Act: A Detailed Overview
A vital part of financial planning, life insurance offers policyholders and their families’ security. The tax exemptions provided by Section 10(10D) of the Income Tax Act of 1961 are among the major advantages of life insurance. The payouts from a life insurance policy are guaranteed to be tax-exempt and subject to specific restrictions by the Section 10(10D) provision. To optimise tax benefits and make wise judgements regarding life insurance investments, it is imperative to comprehend 10(10D) income tax. In this article, we will discuss Section 10(10D) in detail.
Table of Content
What is Section 10(10D) of the Income Tax Act?
The guidelines for the taxability of life insurance claims, including maturity and death benefits, are covered under Section 10(10D) of the Income Tax Act of 1961. The earned bonus and any cash assured that a person receives through their life insurance policy can be tax-exempt thanks to this. The exemptions apply to surrender values, bonuses, and all other kinds of life insurance policy claims. These exceptions can be claimed by individuals (both salaried and non-salaried), associations, bodies of persons, Hindu Undivided Families (HUFs), trusts, corporations, foreign corporations, and others.
Eligibility Criteria and Tax Exemptions for Section 10(10D)
The following requirements must be fulfilled in order to qualify for tax exemptions under Section 10(10D) of the Income Tax Act:
Policyholders of both domestic and foreign life insurance firms are eligible to receive the applicable tax benefits under Section 10(10D).
Tax deductions are available for all life insurance policy claims.
Money received from a life insurance policy, including earned incentives, death payments, and maturity benefits, is eligible for tax deductions under this provision.
The maximum amount that can be demanded for life insurance coverage is unrestricted.
No tax deductions are admissible on the Keyman Insurance Policy payout.
For policies bought between April 1, 2003, and March 31, 2012, the premiums or monthly payments paid in any given year throughout the policy's duration cannot exceed 20% of the total assured.
For life insurance plans taken up on or after April 1, 2012, the premiums cannot be more than 10% of the total insured.
The life insurance premium in any given year should not exceed 15% of the cash value throughout the duration of the policy. Additionally, the purchase date needs to fall on or after April 1, 2013. Additionally, anyone who satisfies the following criteria should be covered by life insurance: (i) anyone with any illness or condition specified in Section 80DDB of the Income Tax Act of 1961. (ii) people with developmental disabilities, as defined by Section 80U of the Income Tax Act of 1961.
Tax Exemption for ULIP Plans Under Section 10(10D)
The Finance Bill of 2021 states that any ULIP plan bought on or after February 2021 that has an annual premium totalling more than Rs. 2,50,000 will not be eligible for Section 10(10D) tax exemptions. However, the death benefit paid to a nominee in the event of the policyholder's passing will be completely tax-exempt.
If the premium paid for any year throughout the policy term does not exceed 10% of the sum assured, one can receive tax exemption on the proceeds of non-ULIP life insurance plans issued on or after April 1, 2023. Additionally, the policyholder's total yearly premiums (for all non-ULIP insurance policies) during the policy period must be less than Rs. 5,000,000 in order to qualify for this exemption.
Advantages of Term Insurance Regarding Section 10(10D)
The tax benefits linked to it under Section 10(10D) of the Income Tax Act of 1961 are among its many noteworthy advantages. The following are the main benefits of term insurance with reference to Section 10(10D):
Tax-free Death Benefit: Recipients receive a death benefit that is entirely tax-free, offering them financial stability free from taxes.
Tax Deduction on Premiums: Up to ₹1.5 lakhs in annual tax deductions are available for term insurance premiums paid under Section 80C.
Low Cost, High Coverage: Term insurance offers affordable premiums for significant coverage. Financial Security for Dependents: Provides beneficiaries with the entire amount promised, tax-free.
No Upper Limit on Exemption: The death benefit's tax exemption has no upper limit.
Simplicity: Uncomplicated rules with obvious tax advantages.
How Does Section 10(10D) Work?
Income from life insurance policies, including benefits paid upon death or maturity, is exempt from the Income Tax Act of India, especially Section 10(10D). The two examples that follow illustrate how Section 10(10D) works:
Illustration 1: Exemption on proceeds after maturity
Assume that Mr. A has been paying monthly payments on a life insurance policy with a guaranteed amount of Rs. 10 lakh within the specified limitations. He receives Rs. 15 lakh in maturity funds (bonus included) at the conclusion of the policy period. The following is how the exception under Section 10(10D) would work:
Sum Assured: Rs. 10 lakh
Maturity Proceeds: Rs. 15 lakh
Since Mr. A has paid the premiums in accordance with Section 10(10D), the entire Rs. 15 lakh maturity amount is exempt from income tax. Mr. A is not required to pay any taxes on this amount.
Illustration 2: Death Benefits Exemption
Now let's look at a scenario where Mr. B's life insurance policy has a sum assured of Rs. 15 lakh. Unfortunately, he passes away, and his nominee receives the Rs. 20 lakh death benefit, which includes the bonus and the insured amount. The following is how the exception under Section 10(10D) would work:
Amount Assured: Rs. 15 lakh
Death Benefit: Rs. 20 lakh
Assuming that Mr. B had been paying the premiums as required, the full Rs. 20 lakh death benefit is tax-free. The candidate is not required to pay taxes on the money received.
Requirements for Maturity Returns Under Section 10(10D)
For life insurance maturity proceeds to qualify for Section 10(10D) tax benefits, the following requirements must be met.
Policies registered under Section 80DD(3) of the Income Tax Act cannot include maturity payouts.
A Keyman insurance policy cannot be the source of the maturity payouts.
Your premium cannot be more than 10% of your sum guaranteed if you purchased your insurance policy after April 1, 2012.
The premium for policies purchased from April 1, 2013, cannot be more than 15% of the sum promised for insurance on the life of (i) A disabled person as described by Section 80U (ii) Policyholders who suffer from any of the conditions listed in Section 80DDB
The money received is not covered by an annuity or pension plan. If the maturity amount of your insurance plan does not qualify for Section 10(10D) exemptions, a TDS deduction will be made in accordance with the following criteria: (i) When PAN data are submitted to the insurer, a 5% TDS deduction will be applied to the net income (maturity amount less premiums paid) (ii) If you fail to provide your PAN information to the insurance company, a 20% TDS deduction will be applied to your net income (maturity amount less premiums paid).
Amendments Proposed in Section 10(10D)
The following points provide insight into a thorough examination of the Amendments put forth in Section 10(10D).
When There Are No Exemptions Permitted According to Section 10(10D)
A person cannot claim a tax exemption under Section 10(10D) of the Income Tax in the situations listed.
Excess Premium on Life Insurance Policy: According to Section 10(10D), if a policy's premium is less than 10% of the actual sum guaranteed, the proceeds are tax-exempt. Nevertheless, the income from that policy is not tax-exempt if it surpasses 10%. On life insurance policies, this situation is known as excess premium.
High Premium Life Insurance Policies: Finance Bill 2023 contains the Sixth and Seventh Proviso to Section 10(10D) to address the payment of excess premiums for high premium life insurance policies. This amendment states that insurance policies bought after April 2023 that have annual premiums beyond Rs. 5 lakh would not be excluded from taxes. The Sixth Proviso states that life insurance policies with premiums over Rs. 5 lakh are not exempt from taxation under Section 10 (10D). A person who has several policies under his name is covered by the Seventh Proviso. This update allows you to take advantage of Section 10(10D) tax exemption for all active policies that are in your name. This exemption, however, is only granted if the total premium paid for all insurance during a given policy's lifetime is less than Rs. 5 lakh. Only those policies whose total premium is less than the specified maximum shall be exempt from Section (10D) if the combined premium for all of these policies exceeds Rs. 5 lakh in a given year.
Exemptions Permitted under Subclauses (c) and (d) of Section 10(10D)
Permitted Exemptions Subclauses (c) and (d) of Section 10(10D) of the Income Tax Act do not apply to any life insurance policy in which the policyholder's death results in a payment to the beneficiary. Death benefits are likewise exempt from the fourth and fifth clauses on ULIP proceeds described above. Death benefits will therefore be fully tax-free.
How to Use Section 10(10D)
To effectively manage your funds, Section 10 (10D) may be a crucial instrument. You must, however, understand how to use it prudently for your own financial gain. These are the three most effective strategies to make prudent use of Section 10 (10D) of a life insurance policy.
Since they are long-term investments, there is a good probability that their performance will fluctuate over time. Policyholders must so keep a careful eye on the execution of their insurance. This will assist you in determining whether your insurance is operating effectively enough to meet your demands going forward. Additionally, you must frequently review the cash value and fees and costs associated with your policy. You can get in touch with your insurer to find out about other good possibilities if you find that the insurance is not providing returns that meet your expectations.
Understand the terms and conditions of the policy: Before choosing to use Section 10(10D) for tax exemption, carefully read the policy document and make sure you understand all of the terms and restrictions. For loans or withdrawals, you need to verify the cash value, fees, extra charges, interest rates, and penalties.
Partial withdrawals can be used to cover unforeseen medical costs, weddings, and short-term needs like a child's education. But it's important to keep in mind that any claim or early withdrawal will reduce the death benefit guaranteed by the policy, and Section 10(10D) may no longer be available. In this case, having separate investments and term insurance coverage can be beneficial.
Conclusion
Section 10(10D) offers policyholders a number of benefits. This section provides helpful strategies for managing your financial needs throughout your life, from taking advantage of tax-free death benefits to carefully using surrender value alternatives. The eligibility requirements and the tax ramifications of various scenarios must be kept in mind, though. You can fully utilise Section 10(10D) and take advantage of its advantages for a stable financial future by closely examining the conditions of your insurance and, if necessary, getting professional advice.
FAQ
Q1. What is the Section 10(10D) amendment in Budget 2023?
The Budget 2021 amendment aligns the tax treatment of ULIPs with mutual funds by stating that proceeds from ULIPs with annual premiums above Rs. 2.5 lakhs will be taxable.
Q2. What is the Section 10(10D) exemption limit?
The exemption amount under Section 10(10D) has no maximum limit. To be eligible for the exemption, the policy premiums must, however, be within certain bounds.
Q3. What are the exceptions under Section 10 (10D)?
Returns from your Keyman insurance policy and any reimbursements you receive under Section 80DD(3) or Section 80DDA(3) are not exempt under Section 10(10D).
Q4. What are the benefits of Section 10(10D)?
Family members can receive financial help from a life insurance policy in the event of the policyholder's death. On the other hand, the sum received is considered income and is exempt from taxes under Section 10(10D).
Q5. What is Section 10(10D) for NRIs?
The conditions of various NRI policies apply to Section 10(10D) of the Income Tax Act. However, upon the insured's death or the policy's maturity, an individual is eligible to obtain a tax exemption benefit.
Q6. Is Section 10(10D) available in the new tax regime?
The Finance Act of 2021 states that Section 10(10D) only applies in cases of ULIP exemption if the premium is less than Rs 2.5 lakh per year. The Finance Act 2023 states that the exemption under section 10(10D) only applies to insurance policies other than ULIPs if the yearly premium is less than Rs 500,000.
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