Section 11, Schedule II(2) (Formerly Section 10(10D))

Overview

Under the Income Tax framework (including the Income Tax Act 2025 updates), Section 11 Schedule II(2) specifies that if the required conditions for income exclusions are met, that specific income becomes tax-exempt.

Key Details from Schedule II Under Section 11

Agriculture Income: Remains exempt.
Life Insurance Policies: The sum assured received under a life insurance policy (including bonus) is exempt if the premium-to-sum-assured ratio meets specific statutory limits based on the year of policy issuance.

Premium Limits by Policy Issue Date

April 1, 2003 to March 31, 2012: The premium must be within 20% of the sum assured.
April 1, 2012 Onward: The premium must be within 10% of the sum assured. For policies issued from April 1, 2013 that cover a person with a disability or a specified disease, the limit is 15%.
ULIPs Issued From February 1, 2021: Total yearly premiums across Unit-Linked Insurance Plans (ULIPs) held must also stay within ₹2.5 lakh.
Traditional Plans Issued From April 1, 2023: Total yearly premiums across plans must also stay within ₹5 lakh.

Life insurance payouts are generally tax-free in India, but this exemption doesn't apply to every policy. While death benefits are usually exempt, maturity and surrender payouts must meet specific conditions, including limits on premiums paid.

From April 1, 2026, Section 11, Schedule II(2) of the Income Tax Act 2025 replaced Section 10(10D) of the Income Tax Act 1961, without changing the existing exemption rules.

In this guide, we explain how these tax rules work, the premium limits for different life insurance policies, and when your payout may become taxable.

From Section 10(10D) to Schedule II(2): What Changed?

From April 1, 2026, the Income Tax Act 2025 replaced the Income Tax Act 1961. Section 11 of the Income Tax Act 2025 exempts the incomes listed in Schedule II. Item 2 on that list covers money you get from a life insurance policy, including bonuses.

So, if you used to look up Section 10(10D) of the Income Tax Act, you’ll now find the same rule at Section 11, Schedule II(2). Nothing else changed. The 10% premium limit, the ₹2.5 lakh and ₹5 lakh premium caps, and the tax-free death benefit all apply just as before.

Note: Two related references also changed as follows:

The deduction on life insurance premiums you pay, earlier Section 80C, is now Section 123 read with Schedule XV.
The 2% TDS on taxable payouts, earlier Section 194DA, now sits in the TDS table under Section 393(1).

You can check how any other old section maps to the new law using the Income Tax Department’s utility comparing the 1961 and 2025 Acts.

Schedule II(2): Eligibility Criteria & Conditions for Tax Exemption

If the policy meets these conditions, its maturity amount, surrender value, and bonuses remain outside your taxable income.

Premium Within the Limit: Your yearly premium must stay within a set share of the actual capital sum assured. That’s the minimum amount the policy promises to pay, not counting bonuses or returned premiums.
Death Benefits: Any amount paid on the death of the insured is tax-free, regardless of the premium or plan type. Since the payout is exempt, the insurer doesn’t deduct TDS. If your nominee later invests the money, they pay tax on the interest they earn as usual.
ULIP Premium Cap: For Unit-Linked Insurance Plans (ULIPs) issued on or after February 1, 2021, your total yearly premium across all ULIPs must stay within ₹2.5 lakh.
Traditional Plan Cap: For endowment plans, money-back, and other non-ULIP plans issued on or after April 1, 2023, your total yearly premium across all such plans must stay within ₹5 lakh. This limit is counted separately from the ULIP cap.

Premium Limits Under Schedule II(2): ULIPs vs. Traditional Life Insurance Policies

Policy Issue Date	Plan Type	Tax-Free If	Taxable If
Before April 1, 2003	All life insurance policies	No premium condition	Not applicable
April 1, 2003 to March 31, 2012	All life insurance policies	Premium is 20% of sum assured or less	Premium exceeds 20% in any year
April 1, 2012 Onward	All life insurance policies	Premium is 10% of sum assured or less (15% for policies issued from April 1, 2013 covering a person with a disability or specified disease)	Premium exceeds the limit in any year
February 1, 2021 Onward	ULIPs	Premium-to-sum-assured ratio is within the limit, and total ULIP premiums are ₹2.5 lakh or less a year	Either test fails. Gains are taxed as capital gains at 12.5% over ₹1.25 lakh
April 1, 2023 Onward	Endowment, money-back and other non-ULIP plans	Premium-to-sum-assured ratio is within the limit, and total non-ULIP premiums are ₹5 lakh or less a year	Either test fails. Gains are taxed at your slab rate

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Tax-Free vs. Taxable Life Insurance Payouts: Examples

Feature	Tax-Free Payout	Taxable Payout
Policy Type	Endowment plan (issued in 2024)	Equity ULIP (issued in 2022)
Policy Term	10 years	10 years
Sum Assured	₹50 lakh	₹30 lakh
Annual Premium	₹4 lakh	₹3 lakh
Premium as % of Sum Assured	8% (within 10%)	10% (within 10%)
Yearly Premium Cap	₹5 lakh (within cap)	₹2.5 lakh (exceeds cap)
Total Premium Paid	₹40 lakh	₹30 lakh
Maturity Amount	₹55 lakh	₹50 lakh
Gain	₹15 lakh (exempt)	₹20 lakh
Long-Term Capital Gains Exemption	Not applicable	₹1.25 lakh
Taxable Gain	Nil	₹18.75 lakh
Tax at 12.5%	Nil	₹2,34,375
Final Amount Received	₹55 lakh (fully tax-free)	₹47,65,625 (after tax)

Although the second option in the table has a lower annual premium, it’s the one that gets taxed. That’s because the cap for ULIPs (₹2.5 lakh) is half the cap for traditional plans (₹5 lakh). If a traditional plan crosses its ₹5 lakh cap, the gain is taxed at your slab rate, and the insurer deducts 2% TDS (which you can adjust against your tax liability when you file).

Exceptions to Tax Exemption Under Schedule II(2)

In the following cases, the Income Tax Department will tax your life insurance payout.

Premiums Above the Limits

If your yearly premium crosses the 10% (or applicable) limit of the sum assured, or your total premiums cross the ₹2.5 lakh ULIP cap or the ₹5 lakh traditional plan cap, the policy’s maturity, surrender, and bonus amounts become taxable.

Early Surrender

A policy that meets the conditions still pays out tax-free when you surrender it. But if you end a regular-premium policy before paying two years of premiums, the Section 123 (earlier 80C, old regime) deductions you claimed are added back to your income that year. For single-premium policies, the same applies if you exit within two years.

Keyman Insurance

Payouts from a Keyman Insurance policy never qualify, even on death. This policy covers the life of an employee or someone connected with the business. The rule still applies if the policy is later assigned to someone else.

Disability-Scheme Payouts

Under Section 127(4), earlier Section 80DD(3), money from a scheme meant for a dependent with a disability is taxable if the dependent dies before you. It’s taxed as your income in the year you receive it.

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Conclusion

Section 11, Schedule II(2) is simply Section 10(10D) under a new name. If you’re buying life insurance for protection, the news is reassuring, as your family’s death benefit stays tax-free in almost every case.

The rules matter more if you’re using insurance to save or invest. For most policies issued from April 1, 2012, your maturity or surrender payout stays tax-free only if your yearly premium is within 10% of the sum assured. Older policies and policies covering a person with a disability or a specified disease have different limits. Newer policies must also stay within the yearly cap: ₹2.5 lakh for ULIPs and ₹5 lakh for traditional plans. If you cross either limit, part of your payout becomes taxable.

Over the years, the government has tightened the tax break on high-premium ULIPs and traditional plans, so they can’t double as tax-free investments and are taxed more like mutual funds. This backs what we at Ditto have always recommended: keep insurance and investments separate. A pure term plan protects your family at a low cost, while dedicated investments can grow your wealth with more flexibility and clearer charges.

Disclaimer: This information is for educational purposes only and does not constitute personalized tax or financial advice. Please consult a tax advisor for your specific case.

Frequently Asked Questions

Is the maturity amount of a life insurance policy always tax-free in India?

No. A maturity amount is tax-free only if the policy meets the Schedule II(2) conditions. For policies issued from April 1, 2012, the yearly premium must stay within 10% of the sum assured. ULIPs issued from February 1, 2021, and traditional plans issued from April 1, 2023, also face yearly premium caps of ₹2.5 lakh and ₹5 lakh, respectively. Pure term insurance plans have no maturity payout. Return-of-premium term plans refund only your own premiums, minus rider premiums, with no interest or gains, and cost 60%-100% more than pure term insurance plans.

Is a death benefit taxable if my premium is more than 10% of the sum assured?

No. Schedule II(2) says the premium conditions do not apply to any sum received on the death of the insured person. So your nominee gets the full death benefit tax-free, even if the premium crossed 10% of the sum assured or the yearly cap. This applies to term insurance plans, ULIPs, endowment plans, money-back plans, and whole life plans. The only exceptions are Keyman insurance payouts and disability-scheme sums under Section 127(4). Any interest your family later earns by reinvesting the money is taxed at their own slab rates.

Does Section 11, Schedule II(2) apply under the new tax regime?

Yes. Section 11 of Income Tax Act 2025, read with Schedule II(2), exempts the payout, so it applies under both the old and the new tax regime. If your policy meets the conditions, the maturity, surrender, or death benefit stays out of your taxable income either way. Under the new regime, you lose the deduction on the premiums you pay. That deduction, earlier Section 80C and now Section 123, is available only under the old regime. So the regime you choose affects your tax savings while paying premiums, not the tax on your payout.

How is Schedule II(2) different from Section 123?

They work at two different ends of a policy. Section 123 of the Income Tax Act 2025, earlier Section 80C, lets you deduct the premiums you pay from your taxable income, up to ₹1.5 lakh a year, along with other eligible investments like PPF (Public Provident Fund) and ELSS (Equity Linked Savings Scheme). It’s available only under the old regime. Schedule II(2), earlier Section 10(10D), exempts the money you receive from the policy under both regimes. Both use a premium-to-sum-assured test. For policies issued from April 1, 2012, the premium must stay within 10% of the actual capital sum assured.

Is TDS deducted when a life insurance payout fails the Schedule II(2) conditions?

Yes. If the payout doesn’t qualify for the exemption and is ₹1 lakh or more, the insurer deducts 2% TDS. This was Section 194DA under the old Act and now falls under Section 393(1). The TDS applies only to the income portion, which is the payout minus the total premiums paid, not the full amount. For example, on a ₹20 lakh gain, the TDS is ₹40,000. You still pay tax at your slab rate on that income and claim credit for the TDS when you file your return.

Are NRIs eligible for the Schedule II(2) exemption on Indian life insurance policies?

Yes. NRIs can claim the exemption on payouts from life insurance policies issued in India, as long as the policy meets the same premium-to-sum-assured and yearly premium cap conditions. Death benefits stay exempt for NRIs too. However, the country where you live may tax the same payout under its own rules. India’s Double Taxation Avoidance Agreement (DTAA) with that country decides how the two interact. Since these rules vary by country, check with a tax advisor before you file in either country.

What happens to my Schedule II(2) benefit if I surrender my policy early?

The surrender value stays tax-free if the policy meets the Schedule II(2) conditions. If it doesn’t, the gain over the premiums you paid is taxable. Surrendering early can also cost you past deductions. Under Schedule XV, if you end a regular-premium policy before paying two years of premiums, you must add back the Section 123 deductions you claimed to your income that year. For a single-premium policy, the same applies if you exit within two years of the policy starting. So check both before you surrender.

Can I claim both Section 123 and Schedule II(2) on the same policy?

Yes, if you’re under the old tax regime and the policy meets both sets of conditions. You can deduct the premiums under Section 123, up to ₹1.5 lakh a year, along with your other eligible investments. Later, the maturity or death payout can be tax-free under Schedule II(2). Both provisions use a premium-to-sum-assured test, so a policy issued from April 1, 2012 needs a premium within 10% of the sum assured. Under the new regime, you lose the Section 123 deduction, but the payout exemption still applies.

Does Section 10(10D) of the Income Tax Act still apply to policies bought before April 2026?

Yes. The applicable exemption rules continue under Schedule II(2). Schedule II(2) carries forward every condition from Section 10(10D) of Income Tax Act, 1961. The limits that apply to your policy still depend on its issue date. A policy issued between April 1, 2003 and March 31, 2012 is tested against the 20% limit, and one issued from April 1, 2012 is tested against 10%. The ₹2.5 lakh and ₹5 lakh caps apply only to policies issued after their start dates. So older policies keep their original tax treatment.

If my total life insurance premiums exceed ₹5 lakh or ₹2.5 lakh, will all my policy payouts become taxable?

Not necessarily. The ₹5 lakh cap applies to non-ULIP policies issued on or after April 1, 2023, and the ₹2.5 lakh cap applies separately to ULIPs issued on or after February 1, 2021. Say you hold two non-ULIP policies issued in 2024, each with a ₹3 lakh yearly premium. Together they cross ₹5 lakh, but one policy can still pay out tax-free if it meets the other conditions. The gain on the other policy may be taxable. Eligibility also depends on the premium-to-sum-assured ratio and exemptions claimed on other policies in earlier years. Death benefits stay tax-free regardless.

If my life insurance payout is taxable, will I pay tax on the entire amount?

No. For a taxable traditional policy, such as an endowment plan, you’re generally taxed only on the income portion, not the whole payout. Say you paid ₹10 lakh in premiums and received ₹12 lakh at maturity. If you didn’t claim tax deductions on those premiums, only the ₹2 lakh gain is taxable. But you can't subtract premiums you’ve already claimed as deductions, which increases your taxable income. Taxable ULIP payouts follow separate capital gains rules, with 12.5% tax on long-term gains above ₹1.25 lakh.

Last updated on: 31 Oct, 2026