As per Section 10(10D) of the Income Tax Act, 1961- the amount of sum assured plus any amount received as policy proceeds on maturity or surrender of policy or on death of the insured are completely tax free for the receiver. But in the following condition it will be taxable.
A life insurance policy issued in the period from 1.4.2003 to 31.3.2012, if the premium payable in any year exceeds 20% of the actual sum assured, then the policy proceeds would be taxable in the hands of the insured. For policies issued on or after 1.4.2012, the above mentioned limit is 10%.
In case the insured suffers from severe disability(80U) or disease(80DDB) as specified by the Income Tax Act and rules and the policy was issued on or after 1.4.2013, then for them the limit will be 15%.
In case the premium payable in any year exceeds the mentioned percentage i.e. 10%, 15% or 20% of sum assured, as described above then, the whole amount received by the policy would get taxed in the year of receipt.
Except, 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 even if premium paid in any year crossed the prescribed percentage of sum assured.
If the amount received on policy maturity or surrender or on death of the insured is free from tax under section 10(10D) then there will be no TDS. The amount received on policy maturity which is not covered u/s 10(10D) will be subject to TDS@5% if the aggregate amount of such receipt exceeds Rs. 100,000/- and if PAN is not available then it will be subject to TDS@20%.
a) Consider Ms. Mamatha has taken a policy from an insurance company with maturity value of Rs. 200,000/-. She had paid premium of Rs. 35,000/-for single premium policy. 10% of the sum assured value shall be Rs. 20,000/- (i.e., 200000 * 10%). The premium paid for the year exceeds 10% of the sum assured. Hence, the policy maturity proceeds are taxable and not entitled to exemption u/s 10(10D) of IT Act.
b) In case, premium paid is Rs.15,000/-, then the whole maturity receipt is eligible for exemption u/s 10(10D) of IT Act.