Are life insurance maturity proceeds taxable under new tax regime?

Taxes in India can be confusing. Just when you think you have mastered the rules, a new Budget announcement changes the game. Recently, the introduction of the New Tax Regime has left many investors scratching their heads.

You might be wondering: “I know the New Regime removes tax deductions like Section 80C. Does that mean it also removes the tax-free* status of my life insurance maturity?”

This is a valid fear. After all, if you are paying premiums for 20 years, you want to be sure that the big cheque you receive at the end isn't slashed by 30% tax.

The good news is that the government still wants to encourage people to insure their lives. Therefore, the core benefit of tax-free* payout remains largely intact. However, the rules have tightened for high net-worth individuals who use insurance purely for investment.

Let’s decode exactly how your money is treated under the current tax laws, specifically focusing on policies from insurers like ABSLI.

The short answer: Mostly No, but High-Value Policies are now taxable

The simple answer is that life insurance maturity proceeds remain tax-free* for the vast majority of policyholders, even under the New Tax Regime. This exemption comes from Section 10(10D)** of the Income Tax Act, which is valid in both the Old and New regimes. However, there are recent "Anti-Rich" amendments you must know: if you bought a ULIP after February 2021 with an annual premium over ₹2.5 Lakh, or a traditional savings plan after April 2023 with an annual premium over ₹5 Lakh, your maturity profits will be taxed.

The "Holy Grail" of Insurance Tax: Section 10(10D)**

To understand the tax rules, you only need to remember one section number: 10(10D)**.

This section of the Income Tax Act is the shield that protects your life insurance money. It states that any sum received under a life insurance policy, including the sum allocated by way of bonus, is fully exempt from tax.

Does this apply to the New Tax Regime? Yes.

Section 10(10D)** is an exemption on income received, not a deduction on income invested.

• Old Regime: You get benefits on Entry (Section 80C deductions on premiums) AND benefits on Exit (Section 10(10D)** exemption on maturity).
• New Regime: You lose the Entry benefit (no Section 80C), but you keep the Exit benefit (Section 10(10D)** still applies).

So, for a standard policyholder paying a reasonable premium, the New Tax Regime changes nothing regarding the final payout. It is still tax-free*.

The "10% Rule" (The Golden Condition)

Before we get to the new exceptions, we must check if your policy passes the basic test. This rule has been around for over a decade.

For your maturity proceeds to be tax-free*, the annual premium you pay must not exceed 10% of the Sum Assured.

• Scenario A: You buy a policy with a Sum Assured of ₹10 Lakh. You pay a premium of ₹50,000.
  a. Calculation: ₹50,000 is 5% of ₹10 Lakh.
  b. Result: This is less than 10%. Your maturity is tax-free*.
  
  

• Scenario B: You buy a policy with a Sum Assured of ₹10 Lakh. You pay a premium of ₹1.5 Lakh.
  a. Calculation: ₹1.5 Lakh is 15% of ₹10 Lakh.
  b. Result: This breaks the 10% barrier. Your maturity proceeds will be Fully Taxable.

Note: For policies issued before April 1, 2012, this limit was 20%. For policies issued to persons with disability (under Section 80U), the limit is 15%.

The New Exceptions: When do you have to pay tax?

In recent years, the government noticed that wealthy individuals were using insurance policies as tax havens. They were parking crores of rupees in insurance plans just to earn tax-free* interest, which wasn't the original intent of life insurance.

To fix this, they introduced two major caps. If you fall into these categories, your Section 10(10D)** shield is broken, regardless of which tax regime you choose.

Exception 1: The "ULIP" Cap (Effective Feb 1, 2021)
This rule applies to Unit Linked Insurance Plans (ULIPs) bought on or after February 1, 2021.

• The Rule: If your aggregate annual premium for ULIPs exceeds ₹2.5 Lakh, the maturity proceeds will be taxed.
• How it is taxed: It is treated like a stock market investment (Equity Mutual Fund). You will pay Capital Gains Tax (12.5% on long-term gains exceeding ₹1.25 Lakh).
• Example: You buy an ABSLI Wealth Plan with a ₹3 Lakh annual premium. When it matures, the profit you made over the years will be taxed as Capital Gains.
  
  

Exception 2: The "Traditional Plan" Cap (Effective April 1, 2023)
This is the newest and most critical change. It applies to Non-Linked policies (Endowment plans, Money-back plans, Savings plans) bought on or after April 1, 2023.

• The Rule: If your aggregate annual premium for such policies exceeds ₹5 Lakh, the maturity proceeds will be taxed.
• How it is taxed: The profit (Maturity Amount minus Total Premiums Paid) is added to your annual income and taxed according to your Income Tax Slab.
• Example: You buy a guaranteed^# savings plan with a ₹6 Lakh annual premium. After 10 years, you receive ₹80 Lakh. You paid ₹60 Lakh in total premiums. The ₹20 Lakh profit is added to your income for that year and taxed.

Important Note on "Aggregate": You cannot split policies to hide. If you buy two policies of ₹3 Lakh premium each (Total ₹6 Lakh), the rule kicks in because the aggregate is above ₹5 Lakh.

Are Death Benefits Taxable?

This is the most critical distinction.

No. The tax rules we discussed above apply only to Maturity Proceeds (money you get while you are alive).

Death Benefits are always 100% tax-free*.

It does not matter if the premium was ₹1 Crore. It does not matter if the policy was a ULIP or a Savings plan. It does not matter if you are in the New Regime or Old Regime. If the money is paid out due to the death of the policyholder, the nominee receives every single rupee tax-free*. Section 10(10D)** has no cap for death claims.

How to calculate tax if you exceed the limits?

If you unfortunately fall into the taxable category (e.g., you pay ₹6 Lakh premium a year for a traditional plan), you don't pay tax on the entire amount. You only pay tax on the income portion.

The Formula:
Taxable Income = Maturity Proceeds - Total Premiums Paid
Example:

• You paid ₹6 Lakh for 10 years = ₹60 Lakh (Total Investment).
  
• You received ₹85 Lakh on maturity. a. Taxable Amount: ₹85 Lakh - ₹60 Lakh = ₹25 Lakh.
  b. This ₹25 Lakh is added to your yearly income and taxed at your slab rate (which might be 30% for high earners).

Strategy: How to stay tax-free*

If you are a high-net-worth individual looking to invest with ABSLI while staying tax-efficient, you can plan smartly:

1. Split the Investment: Instead of putting ₹10 Lakh into one savings plan, put ₹5 Lakh into a Savings Plan (staying under the ₹5L cap) and ₹2.5 Lakh into a ULIP (staying under the ₹2.5L cap). Both buckets remain tax-free* individually.

2. Buy in the name of family members: The limits are per PAN card. If you have a spouse or adult children, you can buy policies in their names to utilize their separate ₹5 Lakh limits.

3. Opt for Term Insurance: Pure term insurance usually has low premiums (well below ₹5 Lakh), so it never hits these taxable thresholds.

Summary Table: Taxability at a Glance

Here is a simple cheat sheet to check the status of your policy.

Final Thoughts

So, are life insurance proceeds taxable under the New Tax Regime?Not for the average Indian.

If you are paying a premium of ₹50,000, ₹1 Lakh, or even ₹4 Lakh a year, you are completely safe. Your returns from ABSLI will land in your bank account without a single rupee deducted for tax, just as they always have.

The government has only targeted very high-value investments. For everyone else, life insurance remains one of the few financial instruments in India that offers the dual benefit of guaranteed^# protection and tax-free* returns.