Ch. 9: Tax Benefits - Section 10(10D) + Section 10(10A)

As we move through life, find a partner, raise a family, or maybe start a new business, the importance of life insurance increases. Investing in life insurance means insuring your greatest asset – you! It provides a financial safety net that helps you to take care of yourself and those you love the most.

Besides providing a life cover and protecting our family’s future, life insurance also provides certain tax benefits.

What are Life Insurance Tax Benefits?

The Income Tax Act, 1961 specifies that every individual who earns an income in India needs to pay income tax on the income earned. However, though the income earned is taxable, the Act also allows for different types of exemptions which help you to lower your taxable income. By investing in a life insurance policy, you can easily claim deductions from your taxable salary.

Section 10 of the Income Tax Act allows a list of exemptions which are available to tax-payers. In this article, we will talk about its two subsections - Section 10(10D) and Section 10(10A).

What is Section 10(10D)?

According to Section 10(10D), the life insurance claim amount and bonus (if any) received will be completely tax-free, regardless of whether the amount is received on -

➔ The death of the insured
➔ Surrendering the policy (ending the policy mid-term)
➔ Maturity of the policy (completion of the policy term)

Which Life Insurance Policies qualify for Section 10(10D) Tax Benefits?

Life insurance policies that either offer a Death Benefit (a fixed sum of money to your family if you pass away during the policy period) or a Maturity Benefit (the sum assured you receive when your policy term ends) qualify for this tax benefit. For example -

1. Term Insurance
2. Whole Life Insurance
3. Endowment Plan
4. Money-Back Plan
5. Child Plan
6. Unit-Linked Insurance Plan (ULIP)

Exemption clauses under Section 10(10D)

The tax benefits under Section 10(10D) are applicable only if the following conditions are fulfilled -

• If the life insurance policy is issued before 1st April 2012, the premium payable should not exceed 20% of the sum assured.
• If the life insurance policy is issued after 1st April 2012, the premium payable should not exceed 10% of the sum assured.

If you are a person with disabilities or suffer from any ailment as per Section 80U or Section 80DDB of the Income Tax Act, you can avail tax benefits under Section 10(10D) only if the following conditions are fulfilled -

• If the life insurance policy is issued before 1st April 2013, the premium payable should not exceed 10% of the sum assured.
• If the life insurance policy is issued after 1st April 2013, the premium payable should not exceed 15% of the sum assured.

Conditions under Section 10(10D) for Maturity Returns

Tax benefits can be claimed under Section 10(10D) on the amount you receive when your policy matures (Maturity Benefit), if the following requirements are fulfilled -

• The maturity benefit paid is not available under a keyman insurance policy (where your employer is the proposer and pays the premiums).
• The amount paid is not an annuity or pension policy payout.
• The payout received is not a part of the employer-sponsored group insurance policy.
• The claim amount is paid on the death of the insured person.
• If you’ve purchased the policy between 1st April, 2003 and 31st March, 2012, the premiums paid during any year should not be more than 20% of the sum assured.
• If you’ve purchased the policy after 1st April 2012, the premium payments made should not exceed 10% of the policy sum assured.

Can you surrender a life insurance policy and still receive tax benefits?

Surrendering a policy means terminating the policy mid-term, or cashing the policy before benefits are due to be paid. There are certain tax rules on surrendering life insurance policies, depending on the type of policy you have, and the day the policy was issued.

Please note: If you don’t meet any of the criteria mentioned above while surrendering your policy, then the surrender amount you receive will not be tax-exempted under Section 10(10D). It will be treated as ‘income from other sources’ and taxed as per the existing tax bracket.

Now, coming to the second subsection -

What is Section 10(10A)?

If you have a Pension Accumulation Plan, some amount from that fund can be commuted. Commutation of pension means withdrawing a part of it in a lump sum.

As per IRDAI guidelines, when your pension accumulation plan matures, you get three options -

• To withdraw 60% of the accumulated fund (this is known as ‘commutation’) and invest the remaining amount in a single-premium annuity plan.
• To invest 100% of the lump-sum net of withdrawals, if any, in a single-premium annuity plan offered by the same insurance company.
• To invest 50% of the lump-sum net of withdrawals, if any, with the same insurance company and the remaining 50% in a single-premium annuity plan offered by another insurance company. Under Section 10(10A), the commuted value of pension you receive is tax-exempted. In simpler terms, you get tax benefits on the amount that you can withdraw - i.e. on 60% of the Maturity Amount.

Which Life Insurance Policy qualifies for Section 10(10A) Tax Benefits?

A Pension Accumulation Plan, under the Retirement Plan, gives you this benefit. It is a type of life insurance plan where you invest your savings to build a large sum for when you retire.

You systematically make payments while you are still working, and accumulate a retirement fund - which you can later withdraw from (Maturity Amount). This will cater to all your post-retirement expenses.

These plans work like regular unit-linked insurance plans or endowment plans. In unit-linked plans, you get the fund value when your policy matures. And in endowment plans, you get a fixed sum of money when your policy matures.

Life insurance is a product that offers you financial safety and security. Though it is a great tax-saving tool, it should not be the only reason you buy life insurance. Take your time, do your research, and buy a policy that’s right for you, that truly protects you and your family against the uncertainties of life.