Understanding Section 10D of Income Tax Act
Section 10D of the Income Tax Act, 1961 deals with the tax exemption of proceeds from a life insurance policy. It provides relief to policyholders from tax liability on the proceeds of a life insurance policy. In this blog, we will discuss the various aspects of Section 10D of the Income Tax Act.
Introduction to Section 10D
Section 10D was introduced in the Income Tax Act in 2003. The purpose of this section is to encourage individuals to invest in life insurance policies by providing tax benefits. This section applies to all life insurance policies issued on or after April 1, 2003.
Exemption under Section 10D
As per Section 10D, the proceeds from a life insurance policy are exempt from tax if the following conditions are met:
- The policy must be in the name of an individual.
- The policy must be issued on or after April 1, 2003.
- The premium paid must not exceed 10% of the sum assured.
- The policy must not be surrendered before the completion of 2 years from the date of commencement.
- In case of death of the policyholder, the proceeds from the policy must be received by the nominee or legal heir.
If all the above conditions are met, the proceeds from the life insurance policy are exempt from tax under Section 10D.
Exceptions under Section 10D
There are certain exceptions to the exemption provided under Section 10D. The following cases are not eligible for tax exemption:
- Policies issued on or after April 1, 2012, but with a premium exceeding 10% of the sum assured.
- Policies issued on or after April 1, 2003, but with a premium exceeding 20% of the sum assured if the policyholder is a person with a disability or a severe illness as specified under Section 80DDB of the Income Tax Act.
- Policies issued on or after April 1, 2013, but with a premium exceeding 15% of the sum assured if the policyholder is suffering from a specified disease or ailment as specified under Section 80DDB of the Income Tax Act.
Taxation on Partial Withdrawals
If the policyholder withdraws a portion of the amount from the policy before maturity, the amount withdrawn will be subject to tax. The tax will be calculated on the amount withdrawn and not on the entire proceeds of the policy.
Calculating Premium Limit
As per Section 10D, the premium paid on a life insurance policy must not exceed 10% of the sum assured to be eligible for tax exemption. This means that if the sum assured is Rs. 10 lakh, the premium paid cannot exceed Rs. 1 lakh in a year.
It is important to note that the premium limit of 10% applies to the annual premium paid in a financial year, and not to the total premium paid over the term of the policy.
Surrendering a Policy
If a policyholder surrenders a life insurance policy before the completion of 2 years from the date of commencement, the tax exemption provided under Section 10D will not apply. The proceeds from the policy will be subject to tax as per the individual’s income tax slab.
If a policyholder surrenders a policy after the completion of 2 years, the proceeds from the policy will be exempt from tax under Section 10D.
Taxation on Maturity Amount
The maturity amount received from a life insurance policy is exempt from tax under Section 10(10D). However, if the premium paid on the policy exceeds the premium limit of 10% of the sum assured, the maturity amount received will be subject to tax.
It is important to note that the tax exemption under Section 10(10D) is available only for life insurance policies and not for other insurance policies like health insurance, travel insurance, or motor insurance.
Taxation on Surrender Value
In case a policyholder surrenders the life insurance policy before the completion of the term, the amount received is called the surrender value. If the policy has been held for a minimum period of 2 years and the premium paid is within the prescribed limit of 10% of the sum assured, the surrender value will be tax-free under Section 10D.
However, if the policy is surrendered before the completion of 2 years, the surrender value will not be tax-free, and it will be added to the income of the policyholder and taxed accordingly.
Taxation on Death Benefit
In case of the death of the policyholder, the amount received by the nominee or legal heir is called the death benefit. The death benefit is tax-free under Section 10(10D) of the Income Tax Act, irrespective of the premium paid or the sum assured.
However, if the policy is surrendered by the nominee or legal heir, the surrender value received will be subject to tax as per the income tax slab of the nominee or legal heir.
Taxation on Bonus
Most life insurance policies offer bonuses, which are additional payments made by the insurer to the policyholder as a share in the profits earned by the insurer. The bonus received on a life insurance policy is tax-free under Section 10(10D) of the Income Tax Act.
However, if the bonus is received separately from the policy proceeds, it will be added to the income of the policyholder and taxed accordingly.
Conclusion
Section 10D of the Income Tax Act provides a significant relief to individuals who have invested in life insurance policies. The exemption of tax on the proceeds of a life insurance policy encourages individuals to secure their future by investing in such policies. Therefore, it is important to understand the provisions of Section 10D before investing in a life insurance policy.
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Frequently Asked Questions (FAQs)
- What is Section 10D of the Income Tax Act?
Section 10D is a provision in the Income Tax Act that provides tax benefits to individuals who invest in life insurance policies.
2. What is the premium limit under Section 10D?
The premium paid on a life insurance policy must not exceed 10% of the sum assured to be eligible for tax exemption under Section 10D.
3. Is the premium limit applicable to the total premium paid or the annual premium?
The premium limit of 10% applies to the annual premium paid in a financial year and not to the total premium paid over the term of the policy.
4. What happens if a policyholder surrenders a policy before the completion of 2 years?
If a policyholder surrenders a policy before the completion of 2 years from the date of commencement, the tax exemption provided under Section 10D will not apply. The proceeds from the policy will be subject to tax as per the individual’s income tax slab.
5. Is the maturity amount received from a life insurance policy exempt from tax?
Yes, the maturity amount received from a life insurance policy is exempt from tax under Section 10(10D) of the Income Tax Act, provided that the premium paid does not exceed the premium limit of 10% of the sum assured.
6. Is the surrender value received on a life insurance policy taxable?
If a policy is surrendered before the completion of 2 years, the surrender value received will not be tax-free and will be added to the income of the policyholder and taxed accordingly. However, if the policy has been held for a minimum period of 2 years and the premium paid is within the prescribed limit of 10% of the sum assured, the surrender value will be tax-free under Section 10D.
7. Is the death benefit received from a life insurance policy taxable?
No, the death benefit received from a life insurance policy is tax-free under Section 10(10D), irrespective of the premium paid or the sum assured.
8. Is the bonus received on a life insurance policy taxable?
No, the bonus received on a life insurance policy is tax-free under Section 10(10D) of the Income Tax Act.
9. Are all types of insurance policies eligible for tax exemption under Section 10D?
No, only life insurance policies are eligible for tax exemption under Section 10D. Other types of insurance policies like health insurance, travel insurance, or motor insurance are not eligible.
10. Is it necessary to have a life insurance policy to save tax under Section 10D?
No, it is not necessary to have a life insurance policy to save tax under Section 10D. There are other investment options available, such as tax-saving mutual funds, National Pension System (NPS), and Public Provident Fund (PPF), that also offer tax benefits.
