Understanding Tax Provisions on Life Insurance Policy Receipts u/s 10(10D)

Aarika | Last updated: 03 February 2025

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The Finance Bill 2025 brings clarity to the taxation of sums received from Unit Linked Insurance Policies (ULIPs) upon redemption. Previously, even if premium limits were exceeded, the tax treatment wasn't always straightforward. Now, if a ULIP doesn't meet the exemption criteria under Section 10(10D), the proceeds will be taxed as capital gains, aligning the tax treatment for all ULIP policies.

Life insurance policies are not just a means of financial security but also offer tax benefits under specific conditions. The Income Tax Act, 1961, under Section 10(10D), provides exemptions on sums received from life insurance policies, including bonuses, subject to fulfilling certain criteria. Let's delve into the key aspects surrounding this provision.

ULIP Redemption Tax: Finance Bill 2025 Clarifications

Q.1. What are the provisions relating to the amount received under a life insurance policy?

Ans. Section 10(10D) provides for income-tax exemption on the sum received under a life insurance policy, including bonus on such policy, subject to certain conditions.

Q.2. What conditions are to be fulfilled to claim an exemption under Section 10(10D)?

Ans. The conditions which are to be fulfilled to claim an exemption under Section 10(10D) include: -

a) premium payable for any of the years during the terms of the policy (life insurance or ULIP) issued on or after 01.04.2012 should not exceed ten per cent of the actual capital sum assured; and

b) amount of premium or aggregate amount of premium payable during the term of such policy or policies should not exceed Rs. 2,50,000 (for Unit Linked Policy) or Rs. 5,00,000 (for other policy) for policies issued after certain dates

Q.3. What happens if the conditions provided under Section 10(10D) are not fulfilled?

Ans. If the conditions are not fulfilled, the sum received under the insurance policy may be charged to tax as capital gains (for unit-linked insurance policy) or income from other sources income (for policy other than ULIP)

Q.4. What changes have been introduced through the Finance Bill 2025?

Ans. In the present provisions, in the case of Unit Linked Insurance Policy, even where payable premium exceeded 10 percent of the sum assured, the sum received on redemption was not being charged to tax as 'capital gain' under sub-section (1B) of section 45. Even though it was not exempt, there was ambiguity regarding the head of chargeability. The current amendment has now made the tax treatment given to all ULIP policies consistent.

Thus, if exemption under Section 10(10D) does not apply, the sum received under both ULIP and other insurance policy shall be chargeable to tax under the head 'capital gains' or 'income from other sources', respectively.

FAQ :

Section 10(10D) provides for income-tax exemption on the sum received under a life insurance policy, including any bonus, provided certain conditions are met.

For policies issued after 01.04.2012, the annual premium must not exceed 10% of the capital sum assured. For ULIPs, the aggregate premium over the policy term should not exceed £2,50,000, and for other policies, it's £5,00,000.

If the conditions are not fulfilled, the sum received from a Unit Linked Insurance Policy may be taxed as capital gains, and for other insurance policies, it will be taxed as income from other sources.

The Finance Bill 2025 clarifies that if exemption under Section 10(10D) is not applicable, the sum received from ULIPs on redemption will be chargeable to tax under the head 'capital gains', making the tax treatment consistent for all ULIP policies.

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