Exemptions Under Section 10(10D) of the Income Tax Act
Life insurance proceeds are fully exempt from tax under Section 10(10D) if certain conditions are met:
- For policies issued on or after April 1, 2012: The annual premium must not exceed 10% of the sum assured.
- For policies issued between April 1, 2003, and March 31, 2012: The annual premium should not exceed 20% of the sum assured.
- In case of death of the insured, where his nominees will receive the policy amount the same shall be tax free in the hands of the nominees, regardless of the premium amount.
If none of these conditions are satisfied, the total proceeds from the life insurance policy will be taxable.
TDS Applicability Under Section 194DA
- The current TDS rate on taxable life insurance proceeds is 5% on the net income component (i.e., maturity or surrender value minus total premiums paid).
- From October 1, 2024, the TDS rate will be reduced to 2%, as per Budget 2024.
- No TDS is deducted if the proceeds qualify for exemption under Section 10(10D).
- If the total payout is less than INR 2,50,000, no TDS is deducted, even if the policy is not exempt.
- A policyholder can also apply for a lower or nil TDS deduction by submitting a declaration under Section 197, based on their income status.