Most Indians believe life insurance maturity proceeds are always tax-free. That used to be true. After tax-law amendments in 2021 and 2023, the tax treatment now depends on two things: when you bought the policy, and how the premium compares to the sum assured. Get this wrong and your "tax-free" maturity arrives with a 5% TDS deduction and a tax bill. Here is the 2026 rulebook.
The Section 10(10D) rule
Maturity proceeds (including bonus) from a life insurance policy are tax-free under Section 10(10D) if the annual premium does not exceed a threshold of the sum assured. Death benefits are always tax-free, regardless of these rules.
| Policy issued | Tax-free condition |
|---|---|
| Before 1 April 2003 | Always tax-free under 10(10D) |
| 1 April 2003 – 31 March 2012 | Annual premium ≤ 20% of sum assured |
| From 1 April 2012 | Annual premium ≤ 10% of sum assured |
| From 1 April 2013 (for severely disabled / specified diseases) | Annual premium ≤ 15% of sum assured |
If your premium exceeds the threshold for the policy year of issue, the maturity proceeds are fully taxable as "Income from Other Sources" at your slab rate.
The ULIP rule (post-Feb 2021)
For ULIPs purchased on or after 1 February 2021: if the aggregate annual premium across all your ULIPs exceeds ₹2.5 lakh in any year, the maturity proceeds become taxable. For equity-oriented ULIPs the gain is treated as long-term capital gains — 10% above ₹1 lakh; for debt-oriented, slab rate. See the deeper ULIP vs term + mutual fund analysis.
The traditional-plan rule (post-April 2023)
For non-ULIP traditional life policies issued on or after 1 April 2023: if the aggregate annual premium across all such policies exceeds ₹5 lakh, the maturity proceeds are taxable. This closed a loophole where high-net-worth buyers were using bundled endowments for tax-free maturity.
Section 194DA — TDS on taxable proceeds
When maturity proceeds are taxable, Section 194DA requires the insurer to deduct 5% TDS on the income portion (maturity proceeds minus total premium paid) if the amount paid exceeds ₹1 lakh in a financial year. If PAN is not provided, TDS jumps to 20%. The recipient then pays the balance tax at slab rate when filing the return.
Worked examples
| Scenario | Tax outcome |
|---|---|
| Endowment policy issued 2010, SA ₹10L, premium ₹50,000/yr (5% of SA) | Tax-free at maturity (within 20% rule) |
| Endowment policy issued 2018, SA ₹10L, premium ₹1.2L/yr (12% of SA) | Fully taxable — exceeds 10% rule; 5% TDS under 194DA |
| ULIP bought 2022, ₹3L/yr premium (one of several ULIPs, aggregate ₹3L) | Taxable as LTCG — aggregate exceeds ₹2.5L |
| Traditional endowment bought 2024, ₹6L/yr premium | Taxable at slab — exceeds ₹5L aggregate |
| Term plan death benefit (any year) | Always tax-free under 10(10D) |
Death benefit — always tax-free
Whatever the maturity rules, death benefits paid to a nominee under any life insurance policy are tax-free under Section 10(10D). The amendments described above apply only to maturity / survival benefits, not death claims. This is the core reason term insurance is so powerful — the death payout is large, tax-free and untouched by either rule.
What to do
- Check your premium-to-SA ratio for any policy bought after April 2012 — if premium > 10% of SA, maturity will be taxable.
- For ULIPs bought after Feb 2021, total your annual premium across all ULIPs — if > ₹2.5 lakh, maturity will be taxable.
- For traditional plans bought after Apr 2023, total annual premium across non-ULIP plans — if > ₹5 lakh, taxable.
- Provide PAN to the insurer — avoids the 20% TDS rate.
- Report 194DA TDS in your ITR and claim credit; pay any balance tax at your slab.
- For tax planning going forward, see 80D health insurance benefits and the broader GST-on-insurance 2026 update.
Frequently asked questions
Is life insurance maturity tax-free in India?
Often, but not always. Maturity proceeds are tax-free under Section 10(10D) if the annual premium stays within 10% of sum assured (for policies after April 2012). ULIPs above ₹2.5L/year aggregate premium (post-Feb 2021) and traditional plans above ₹5L/year aggregate (post-Apr 2023) are taxable.
What is Section 10(10D)?
It exempts life insurance maturity proceeds and death benefits from income tax, subject to the premium-to-sum-assured threshold for the policy's year of issue. Death benefits are always exempt regardless.
What is Section 194DA?
When maturity proceeds are taxable, Section 194DA requires the insurer to deduct 5% TDS on the income portion (proceeds minus premium paid) if the amount exceeds ₹1 lakh in a financial year. The recipient settles the balance at slab.
Is the death benefit always tax-free?
Yes. Death benefits to a nominee under any life policy are exempt under Section 10(10D), regardless of the premium-to-SA rule, the ULIP rule or the traditional-plan rule.
Why is my ULIP maturity being taxed?
If you bought the ULIP after 1 February 2021 and your aggregate annual premium across all ULIPs exceeds ₹2.5 lakh, the proceeds are taxable as long-term capital gains (10% above ₹1 lakh on equity-oriented).
Sources: Income Tax Act 1961 Sections 10(10D) and 194DA; Finance Acts 2003, 2012, 2013, 2021 and 2023 amendments; CBDT circulars; accessed May 2026. Tax thresholds and rates can change with each Budget — verify against the current tax law before filing. Editorial research, not tax advice.
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