If at the time of withdrawal, policy is not satisfying the condition of 10(10)d which is minimum times of sum assured to premium then the policy will be termed as Taxable. and the same happened in your case which has made your policy taxable. Now the complete maturity proceeds have become taxable.

You can gauge this from the fact that 2% TDS was deducted on the complete proceeds and not only of the gain amount.

This is the beauty of Insurance policies, either nothing is taxable if policies falls in 10(10d) or everything is taxable!!!

These facts(taxability of total proceed and not just bonus) have not been cleared  so far by the isurance companies, or at least IRDA, by which so many people are still suffering.

I could dig out Circular 7/2003 Finance Act, 2003 - Explanatory Notes on provisions relating to Direct Taxes

Please read Para 10.3 (reproduced below)

10.3 The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.

Please read the sentence with bold letters.

Kamalakar