Life Insurance and Income Tax: When Does Section 10(10D) Exemption Not Apply?

Life Insurance and Income Tax: When Does Section 10(10D) Exemption Not Apply?

Normally, when an individual receives the sum of a life insurance policy, it is the sum of the assured amount and the bonus. The sum is exempt from tax under Section 10(10D). Meaning, the person is not required to pay any income tax on that amount. However, many times exemption is not applicable under this section under certain conditions. This amount becomes taxable when Section 56(2)(xiii) applies.

Section 56(2)(xiii) of the Income Tax Act deals with how the amount received from a life insurance policy is taxed, especially when the usual exemption under Section 10(10D) is not available. Section 56(2)(xiii) applies from Assessment Year 2024-25 onwards.

There are three specific situations where Section 56(2)(xiii) does not apply, and the amount is either taxable under a different section or completely exempt:

• Unit Linked Insurance Policies (ULIPs): If the sum of the life insurance is received under a Unit Linked Insurance Policy (ULIP) and it is not exempt under section 10(10D), it is taxable as capital gains under Section 45. Therefore, Section 56(2)(xiii) is not applicable in this case.
• Keyman Insurance Policies: If the sum of the life insurance is received under a Keyman insurance policy, the amount received is taxable under Section 15 (if paid as salary), Section 28 (if it is business income), or Section 56(2)(iv) (in other cases). Therefore, Section 56(2)(xiii) is not applicable in this case.
• On Death of the Policyholder: If the sum of the life insurance is received on the death of a person, nothing is taxable, even if it is a ULIP, keyman policy, or any other life insurance policy. The reason behind this is that Section 10(10D) allows full exemption on death benefits.

If a life insurance policy does not fall under any of the above exemptions and also does not fall under Section 10(10D) due to the high premium amounts, then the amount received is taxable under Section 56(2)(xiii). This happens when the annual premium exceeds a certain limit during any year of the policy term. The following are the limits:

Date of Policy Issue	Premium Limit Beyond Which 10(10D) Exemption is Denied
Between 01-Apr-2003 and 31-Mar-2012	If the premium in any year exceeds 20% of the sum assured
Between 01-Apr-2012 and 31-Mar-2023	If the premium in any year exceeds 10% of the sum assured
On or after 01-Apr-2013 (for persons with disability – Sec 80U – or specified disease – Sec 80DDB)	If the premium in any year exceeds 15% of the sum assured
On or after 01-Apr-2023	If the premium in any year exceeds ₹5,00,000, or 10% of the sum assured (whichever condition applies)

If the annual premium limit stays within the aforementioned limit, the entire maturity amount is tax-free under Section 10(10D). If the annual premium exceeds the above limits during the policy term, then the amount will be taxable, except in the case of death (fully exempted).

If the life insurance policy was taken before April 01, 2003, nothing is taxable, even if the premium was very high. These old policies are fully exempt.