Most questions about life insurance and tax in India are really two different questions wearing the same words, and the answers point in opposite directions.
Does my family pay tax on the death claim? No. That answer is clean and has no conditions worth worrying about.
Do I pay tax when my policy matures and I am still alive? That depends on three tests, two of which were introduced recently enough that a considerable amount of published guidance — including material still being written — has not caught up.
Here is each one.
The death benefit is exempt, and the caps do not touch it
Section 10(10D) exempts sums received under a life insurance policy. Successive Finance Acts then added provisos restricting that exemption for high-premium policies, which is where all the complication lives.
Those restrictions carry an explicit carve-out: the provisions of the fourth, fifth, sixth and seventh provisos do not apply to any sum received on the death of a person.
So a death claim is exempt whatever the premium was, whenever the policy was issued, and whether it is a term plan, an endowment or a ULIP. If a dependant receives a lump sum or an annuity because the insured died, it is exempt.
This is worth being unambiguous about, because the premium caps generate enough anxiety that people start to wonder whether their family's claim is at risk. It is not. Everything that follows is about living payouts.
Test one: premium against the sum assured
The oldest of the three tests, and the one people most often forget because it is not expressed in rupees.
For a policy issued on or after 1 April 2003, the exemption applies only if the premium paid in any financial year does not exceed 20% of the actual capital sum assured. For a policy taken on or after 1 April 2012, that figure drops to 10%.
In practice this is a test of what kind of product you bought. A term plan passes it without effort: a premium of ₹15,000 against a sum assured of ₹1,00,00,000 is nowhere near 10%. A short-premium-paying endowment or money-back policy, where you pay a great deal relative to the cover, is where it bites.
A policy can satisfy the rupee caps below and still fail this one. They are cumulative tests, not alternatives.
Test two: ₹5,00,000 for traditional policies
With effect from AY 2024-25, no exemption is available for a life insurance policy other than a ULIP, issued on or after 1 April 2023, where the premium payable for any year during the term of the policy exceeds ₹5,00,000.
Three details decide whether this catches you:
- The issue date. Policies issued before 1 April 2023 are outside it entirely. An endowment policy bought in 2019 with an ₹8,00,000 annual premium is unaffected.
- "Any year", not the total. It is judged on the premium payable in a single year during the term. A policy costing ₹4,00,000 a year for fifteen years is fine. One costing ₹6,00,000 in a single year is not.
- It aggregates across policies. Where more than one such policy is held, the rule looks at the aggregate premium, which is the part people miss when they split a large commitment across two policies in the belief that each is tested separately.
Test three: ₹2,50,000 for ULIPs
ULIPs got there first, and with a lower number.
A sum received from a Unit Linked Insurance Plan is not entitled to the exemption if the ULIP is issued on or after 1 February 2021 and the premium payable for any previous year during the term exceeds ₹2,50,000.
So the ULIP threshold is half the traditional-policy threshold and arrived two years earlier. The gap is deliberate: a ULIP is a market-linked investment inside an insurance wrapper, and the cap exists to stop large investments being routed through that wrapper for the exemption.
CBDT Circular No. 2 of 2022 sets out the guidelines for applying the ULIP rules, including how multiple policies are handled.
The IFSC exception
One narrow but real carve-out: the cap on premium has been removed where the life insurance policy is issued by an IFSC-based insurer. If your policy comes from an insurer operating in an International Financial Services Centre, the rupee caps above do not apply in the same way.
This affects a small number of people and is worth checking rather than assuming, in either direction.
What happens when a policy fails
Failing a test does not make the whole payout taxable as if it were salary. What becomes taxable is the income element — broadly, the excess of what you receive over what you paid in — and it is taxed under the residual head rather than as a capital gain, with tax deducted at source on the income portion when the policy pays out.
The practical consequence is that a policy sold to you as "tax-free maturity" in 2024 with a ₹7,00,000 annual premium is not tax-free, and the shortfall surfaces fifteen years later when the money arrives and the salesperson is long gone.
What this means for buying a policy
Two conclusions follow, and neither is about tax planning.
Term insurance is almost entirely unaffected by any of this. The premium is small relative to the sum assured, so test one passes comfortably; the premium is nowhere near ₹5,00,000, so test two does not apply; and it is not a ULIP. The payout is a death benefit, which is exempt regardless. If what you need is cover for people who depend on your income, the tax position is simply not a complication.
Investment-linked insurance is where the questions live — and it is worth asking whether the wrapper is earning its cost at all. The exemption used to be a substantial part of the case for endowments and ULIPs at high premiums. Above the thresholds it is gone, and what remains is an investment product with insurance charges attached.
There is a further point that changes the arithmetic again. Under the new tax regime — which is now the default — the premium you pay does not earn a Section 80C deduction either, because 80C is not available there. A product once sold on a deduction going in and an exemption coming out may now offer neither.
What to actually check
- When was the policy issued? Before 1 February 2021, before 1 April 2023, or after — the dates decide which caps apply at all.
- Is it a ULIP? The threshold halves.
- What is the premium as a percentage of the sum assured? Over 10% for a post-2012 policy and the rupee caps never even come into it.
- Do you hold more than one policy? The caps look at the aggregate.
- Is the cover itself right? That question is separate from tax and matters more.
This article explains the rules. It is not advice on your policy or your return. Tax law changes, the provisos to Section 10(10D) have been amended several times, and the treatment of any particular policy depends on its terms and issue date. Verify against the Income Tax Department's own material or take advice from a chartered accountant before relying on any of this.
Sources
- Income Tax Department — Are receipts from life insurance policies on maturity along with bonus taxable? (opens in a new tab)
- Income Tax Department — Tax free incomes (opens in a new tab)
- Income Tax Department — Section 10 (opens in a new tab)
- CBDT Circular No. 2 of 2022 — guidelines under section 10(10D) (opens in a new tab)
- Income Tax Department — Exempt income (opens in a new tab)
This article is general information for an Indian audience and reflects the position for AY 2026-27. It is not financial, tax or insurance advice. The provisos to Section 10(10D) have been amended repeatedly and the treatment of a particular policy depends on its issue date, its type and its terms. Take advice from a chartered accountant before acting on any of this. Last reviewed 12 September 2026.
