Section 10(10D) Explained: How to Make Your Life Insurance Payouts 100% Tax-Free

What is Section 10(10D)? Section 10(10D) of the Income Tax Act allows you to receive the maturity or death benefit from a life insurance policy completely tax-free, as long as certain conditions are met. Whether it’s a term plan, endowment, or ULIP, as long as your policy follows the rules, including the premium staying within 10% of the sum assured (for policies issued after April 1, 2012) or 20% (for those issued before that), you won’t owe a rupee in tax when the payout comes in. This section is specifically useful if you’re using life insurance not just for protection, but also as part of your long-term financial planning.

A ₹1 crore term insurance payout or a 20-year ULIP maturity sounds like a solid financial cushion until you realise it might be taxed. Yes, that lump sum you or your family expects isn’t always tax-free by default. The real gatekeeper here is Section 10(10D) of the Income Tax Act, and it comes with conditions most people overlook. At Ditto, we’ve helped countless customers navigate these rules, and we have shown them how small oversights like paying a premium that’s too high or exiting a policy early can trigger unexpected tax bills. 

This guide explains how Section 10(10D) works, the tax benefits it offers, eligibility rules, qualifying policies, and common pitfalls. With real examples and simplified insights, it’s your go-to resource before buying, reviewing, or claiming life insurance so you can keep your payout 100% tax-free and avoid costly mistakes.

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What is Section 10(10D) (and Why You Should Care)?

Section 10(10D) ensures life insurance payouts, especially those meant for your family, aren’t taxed like regular income. If you’re paying premiums to protect your future or invest long-term, the returns shouldn’t be taxable. However, as insurance evolved into a mix of protection and investment, the government introduced conditions. Now, 10(10D) exemptions apply only if your policy meets specific rules on premiums, sum assured, and issue date.

See, for instance, if you’ve bought a term insurance plan or a ULIP in the last few years, chances are this rule directly affects you. But here’s the catch: not every policy qualifies automatically. So it’s worth knowing how it works before you assume your payout is 100% tax-free.

Now that you know what 10(10D) is and why it matters, let’s look at the eligibility criteria for these tax benefits.

Conditions You Must Meet to Get This Tax-Free Benefit

While Section 10(10D) offers generous tax exemptions, especially on death benefits, maturity payouts come with conditions. If your policy doesn’t meet them, the payout may be taxable.

Here’s what the Income Tax Department expects:

1. Premium Should Not Exceed 10% of Sum Assured

• For life insurance policies issued after April 1, 2012, the annual premium must be ≤10% of the sum assured to qualify for Section 10(10D) tax exemption.
• Example: If your sum assured is ₹10 lakhs, your yearly premium should not exceed ₹1 lakh.
• If you exceed this limit, the maturity proceeds become fully taxable. Depending on how the income is treated:
• If treated as capital gains (for certain plans like ULIPs),
  • Gains may be taxed as Long-term Capital Gains (LTCG) at 12.5% (post-July 2024) on amounts above ₹1.25L.
• For traditional policies where capital gain classification doesn't apply,
  • The payout may be taxed as “Income from Other Sources” at your applicable slab rate.

2. Special Rule for ULIPs (Post-Feb 2021)

• For ULIPs issued on or after Feb 1, 2021:
  • Tax-free maturity applies only if total annual premium ≤ ₹2.5L across all ULIPs.
  • If premium exceeds ₹2.5L in any year, the maturity proceeds are taxed as capital gains under Section 112A.
    • Gains above ₹1.25L (as per new 2024 rules) taxed at 12.5%.

3. Policy Must Be a Life Insurance Product

• The plan must:
  • Cover the risk of death
  • Provide a defined sum assured
• Health insurance, annuities, or pension products don’t qualify under 10(10D).

4. Minimum Holding Period

• To retain tax benefits, you must hold the policy for a minimum duration:
  • 2 years for traditional plans (like endowment or whole life)
  • 5 years for ULIPs
  • For term insurance plans, there is no minimum holding period.
• Surrendering early makes the payout taxable and may reverse any 80C benefits claimed.

5. TDS on Non-Qualifying Policies

• If your policy doesn’t meet 10(10D) conditions, the insurer deducts TDS at 5% on the maturity amount (after subtracting premiums paid).
• This is in addition to your regular income tax liability.

When Section 10(10D) Doesn’t Work (And You Might Owe Tax)

• You paid a premium that exceeded 10% of the sum assured – common with low-cover savings plans.
• You bought a ULIP post-Feb 2021 with premiums over ₹2.5L/year – it’s taxed like a mutual fund.

You surrendered your policy too early – before 2 years (traditional) or 5 years (ULIP) – and the payout is fully taxable.

Bottom Line:Section 10(10D) is powerful, but not automatic. Stick to the limits, hold your policy for the required term, and double-check compliance. Especially for ULIPs or high-premium plans. A small oversight can turn a tax-free benefit into a taxable event.

In Short: Watch Out for These Traps

Scenario	What Happens
Premium > 10% of sum assured	Maturity becomes taxable
ULIP premium > ₹2.5L post-2021	Gains taxed like mutual funds (LTCG @12.5%)
Policy surrendered early	Entire payout taxed + possible 80C reversal

Who Can Claim Tax Benefits Under Section 10(10D)?

Section 10(10D) isn’t just some fine-print tax rule but is a major advantage for certain kinds of policyholders. If your plan is structured right, you can walk away with a large lump sum, without giving a single rupee to the taxman. Here’s who stands to gain the most:

1) Term Insurance Policyholders

If you’ve bought a term plan, you’re already in the sweet spot. Death benefits (often ₹1 crore or more) are fully tax-free under Section 10(10D), with no conditions or maturity clauses. Since term plans are low-cost with high coverage, the premium rarely crosses 10% of the sum assured. So, they almost always meet the eligibility criteria by default.

2) Long-Term Endowment & ULIP Investors (Who Follow the Rules)

If you’ve paid into an endowment or ULIP for 15–20 years and kept premiums within limits (₹5L/year for endowment, ₹2.5L/year for post-April 2023 ULIPs), your maturity amount is fully tax-free—a substantial lump sum, exempt under 10(10D).

3) High-Income Individuals with Custom Plans

If you’re a high-income earner with large insurance investments, you can still claim Section 10(10D) benefits, provided you stay within the annual premium limits: ₹2.5L for ULIPs (post-2021) and ₹5L for traditional plans (post-2023). To do this, consider splitting your investment across multiple policies. For example, instead of one ₹5L ULIP (which would lose the exemption), opt for two ₹2.5L ULIPs, keeping each within the limit so your maturity proceeds remain tax-free.

4) Families Relying on Life Cover

Section 10(10D) isn’t just about saving taxes, it’s about protecting the full value of the payout your loved ones may depend on. For families counting on life insurance to cover everything from EMIs to children’s education, keeping that money intact (and untaxed) can make all the difference.

Want a deeper breakdown of all life insurance tax benefits beyond just Section 10(10D)? Read this detailed guide.

But it’s not just about who benefits; it’s also about which policies are designed to stay compliant. Some insurance plans fit neatly into 10(10D). Others? Not so much.

What Kinds of Insurance Policies Qualify for 10(10D) Tax Exemption?

While the general rule sounds simple:"life insurance = tax-free maturity", there are important nuances based on policy type and premium conditions.

1. Term Insurance Plans: These are pure protection plans with no investment or savings component. The death benefit paid to the nominee is always fully tax-exempt under Section 10(10D). There's typically no maturity amount, so the tax exemption is focused solely on death payouts, making them ideal for pure protection and tax-free support for families.
2. Endowment Plans: These are savings-cum-insurance policies that pay out a lump sum on maturity or death. The maturity amount and any bonuses are tax-free under Section 10(10D) if the annual premium does not exceed 10% of the sum assured. For example, if the sum assured is ₹10 lakhs, the yearly premium should not exceed ₹1 lakh. These are great for those who want guaranteed returns along with tax savings.
3. Whole Life Insurance Policies: These policies cover you for your entire lifetime and often include a savings or bonus component. They receive similar tax treatment as endowment plans, being fully exempt under 10(10D) if the premium rules (annual premium not exceeding 10% of the sum assured) are followed. They are also useful for estate planning, as the payout occurs upon death, whenever that occurs, making them suitable for long-term planners and legacy builders.
4. ULIPs (Unit Linked Insurance Plans): ULIPs combine life insurance with market-linked investments. For ULIPs, the maturity proceeds are tax-exempt under Section 10(10D) if the annual premium does not exceed ₹2.5 lakhs. This condition specifically applies to ULIPs purchased on or after February 1, 2021.

When Are ULIPs Tax-Exempt Under Section 10(10D)?

Maturity proceeds from a ULIP are tax-free if:

• The policy was issued before February 1, 2021
  → Maturity proceeds are fully exempt, regardless of premium amount.
• The policy was issued on or after February 1, 2021, and
  → Total annual premium (across all ULIPs) is ≤ ₹2.5 lakh in any policy year.

When Are ULIPs Taxable?

ULIPs lose the 10(10D) exemption and become taxable as capital gains if:

• The policy is issued on or after February 1, 2021, and
• Annual premium exceeds ₹2.5 lakh in any policy year.
• The ₹2.5 lakh limit is cumulative across all ULIPs held by an individual.

Budget 2025 Update – Key Changes

• Budget 2021 introduced taxation for high-premium ULIPs but lacked clarity on the type of tax.
• Budget 2025 confirms: → These ULIPs are now treated as capital assets. → Gains are taxed under the capital gains regime, not as income from other sources.

How Are High-Premium ULIPs Taxed?

If your ULIP doesn’t qualify under Section 10(10D):

• Maturity or redemption gains are taxed under Section 112A, similar to equity mutual funds.
• If held for more than 12 months, it qualifies as a long-term capital asset.

Long-Term Capital Gains (LTCG) Tax (Effective July 23, 2024):

• Exemption: ₹1.25 lakh/year
• Tax Rate: 12.5% on gains above ₹1.25 lakh (Earlier: ₹1 lakh exemption and 10% tax)

What If the Policyholder Passes Away?

No matter when the policy was issued or how high the premium, the death benefit is always tax-free under Section 10(10D).

Bottom Line

If your ULIP:

• Was issued before Feb 1, 2021 → Tax-free maturity
• Was issued after Feb 1, 2021, and premium is ≤ ₹2.5L/year → Still tax-free
• Was issued after Feb 1, 2021, and premium exceeds ₹2.5L/year → Maturity becomes taxable

Ditto’s Take: We usually tell customers that not all policies are equal when it comes to tax savings. ULIPs offer market-linked growth, but if you're focused on tax benefits, term insurance and guaranteed-return plans like endowment or whole life policies are more predictable and easier to qualify under Section 10(10D).

Quick Recap:If your goal is tax-free returns, stick with:

• Term insurance (for protection)
• Endowment or whole life plans (for savings + tax)
• Carefully structured ULIPs (only if within limits)

Now that you know which types of policies qualify, let’s break down the part everyone actually cares about: how much tax you can save.

How Much Tax Can You Actually Save Under Section 10(10D)?

Life insurance payouts, whether from a term plan or a maturity-focused policy, can run into lakhs or even crores. Section 10(10D) is designed to protect that money from being taxed, if your policy meets the required conditions.

Let’s look at some scenarios to show just how much you can save.

We’ll look at two common types of policies:

• Term Insurance – where your family receives a death benefit
• ULIPs/Endowment Plans – where you receive a maturity benefit

Example 1: Term Plan – ₹1 Crore Cover

A client, 33, bought a term insurance plan with a ₹1 crore cover and pays just ₹12,000 per year. Tragically, if something were to happen at age 50, his family would receive the full ₹1 crore payout.

Now imagine this payout being taxed at a 30% slab, that’s ₹30 lakh gone.

But because the customer’s policy qualifies under Section 10(10D), his nominee gets the entire ₹1 crore tax-free:

1. No TDS.
2. No deductions.
3. No conditions to meet.

That’s ₹30 lakh in savings, just like that.

Why it’s clean: Term plans only offer a death benefit, so Section 10(10D) applies by default. No cap on premium. No loopholes.

Example: ULIP – ₹1 Crore Maturity Proceeds (Post-2021)

In March 2022, a customer bought a ULIP to grow her wealth over 15 years. She paid ₹3 lakh annually, expecting around ₹1 crore at maturity.

But here’s the twist. Since her policy was issued after Feb 1, 2021 and the premium exceeds ₹2.5 lakh, Section 10(10D) no longer applies. Making matters worse, the maturity proceeds are now taxable as capital gains under Section 112A.

So instead of receiving ₹1 crore tax-free, she faces this:

Capital Gains Tax Calculation

Detail	Amount
Total Premiums Paid (15 years)	₹3L × 15 = ₹45 lakh
Maturity Amount	₹1 crore
Capital Gain	₹1 crore – ₹45L = ₹55 lakh

Under updated Long-Term Capital Gains (LTCG) rules (from July 23, 2024):

• Exemption: ₹1.25 lakh
• Taxable Gain: ₹55 lakh – ₹1.25 lakh = ₹53.75 lakh
• Long-Term Capital Gains (LTCG) Tax @ 12.5%: ₹53.75L × 12.5% = ₹6,71,875

Her post-tax return? ₹93.3 lakh. Not bad, but still ₹6.7 lakh lost to tax. Had she kept premiums under ₹2.5L, she’d owe nothing.

The takeaway? For investment-heavy policies like ULIPs, exceeding the threshold, even slightly, can trigger a big tax bill.

Lesson for investors: 1. High-premium ULIPs bought after Feb 2021 can look attractive on paper, but the capital gains tax at maturity is real. 2. Always factor in tax implications when evaluating ULIPs. 3. Alternatives like mutual funds for growth + term insurance for protection may offer more flexibility and tax efficiency.

Quick Checklist to Save Under Section 10(10D)

• Stay within premium limits (₹2.5L/year for ULIPs post-2021).
• Avoid high-premium investment plans that break tax thresholds.
• Term plans = tax-free by default, no complications.

Ask yourself: Is your goal protection or returns?For protection, a term plan + 10(10D) is the safest bet. For returns, stay sharp on the tax rules.

So, with all these conditions and caveats, is Section 10(10D) still worth planning for in 2025? We will see that in the next section.

Is Section 10 (10D) Still Worth It in 2025?

Yes, absolutely. But there are a few caveats.

Section 10(10D) remains one of the cleanest tax exemptions in 2025. If your life insurance policy meets the required conditions, it can save your family lakhs in taxes on maturity or death payouts. But qualifying isn’t automatic. You need to be intentional about how your policy is structured.

Why It Still Matters

• Death benefits are always tax-free, with no limits or fine print.
• Maturity benefits are tax-exempt but only if your premiums stay within thresholds (10% of sum assured for traditional plans, ₹2.5L/year for post-2021 ULIPs).
• No TDS, no slab-based tax, no surprises—just clean, lump-sum payouts.

But Beware of Common Pitfalls

• Many assume all insurance plans are tax-free, but high-premium ULIPs or guaranteed return plans can lose 10(10D) benefits if not carefully structured.
• Tax rules can and do change—like the Feb 2021 ULIP update. A policy that qualifies today might not tomorrow, especially for high-value investors.

Ditto’s Advice: How to Maximize Your 10(10D) Benefits

To ensure your life insurance payout stays 100% tax-free, make these steps part of your decision-making:

1) Choose Term Plans for Guaranteed Tax-Free Protection

Term insurance offers high coverage at low premiums, and the death benefit is always fully exempt under 10(10D). No conditions. No tax. No complications.

2) Be Strategic with ULIPs and Endowment Policies

These can offer tax-free maturity—but only if you:

• Keep annual premiums within limits (₹2.5L for ULIPs, 10% of sum assured for others)
• Hold the policy for the minimum lock-in period A well-structured plan can give you the returns and the exemption. A poorly structured one could turn taxable.

3) Ask These Questions Before You Buy:

• What’s the sum assured and annual premium?
• Does the policy meet Section 10(10D) eligibility?
• What are the tax rules on death vs. maturity? A 5-minute check now could prevent a ₹5–10 lakh tax bill later.

4) Stay Updated on Policy Changes

Tax rules evolve. Review your policy annually, especially if it’s high-value or bought post-2021. Better yet, consult a qualified CA or insurance advisor to stay ahead of new regulations.

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Disclaimer: This article is meant for educational purposes only. Tax laws, including Section 10(10D) and their interpretation, can change over time. Before making any financial or tax-related decisions, we strongly recommend consulting a qualified tax advisor or Chartered Accountant (CA) to understand how these rules apply to your specific situation.

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