Got Money from a Life Insurance Policy or ULIP? Here's How It Is Taxed and Reported in Your ITR
In India, life insurance policies occupy a unique position, as they attract dual benefits of deduction at the premium stage (Section 80C) and exemption at the receipt stage (Section 10(10D)).
However, the Finance Act 2021 and the Finance Act 2023 have significantly curtailed exemptions, particularly for LIPS & Unit-Linked Insurance Plans (ULIPs) with high annual premiums.
Hence it’s very crucial to identify correct tax treatment under the right head, correctly mapping to ITR schedules, and reconciling with AIS/Form 26AS data.
If you don’t know it then this article is for you.
LIP vs ULIP
| Parameter |
Traditional LIP |
ULIP (Unit Linked Insurance Plan) |
| Nature |
Pure insurance + guaranteed/bonus returns |
Insurance + market-linked investment in equity/debt funds |
| Returns |
Sum assured + accrued bonus (non-market linked) |
Fund value (NAV-based) at maturity market linked |
| Key Governing Section |
Section 10(10D) traditional exemption route |
Section 10(10D) proviso special ULIP regime post FA 2021 |
| Tax on Gains (if taxable) |
Income from Other Sources (Section 56) |
Capital Gains LTCG u/s 112A (equity) or STCG (debt-like funds) |
Section 10(10D): Exemption Framework
Section 10(10D) grants exemption on any sum received under a life insurance policy including bonus. However, this exemption is subject to several conditions and specific exclusions.
| Sr. No |
Condition |
Details |
| 1 |
Premium-to-Sum-Assured Ratio (LIP) |
Annual premium must NOT exceed 10% of sum assured (for policies issued on/after 01.04.2012). For policies issued before 01.04.2012, threshold is 20% of sum assured. |
| 2 |
Premium-to-Sum-Assured Ratio (LIP Disability) |
Where policy covers person with disability u/s 80U or critical illness u/s 80DDB, premium threshold is 15% of sum assured (policies issued on/after 01.04.2013). |
| 3 |
Death Claim Always Exempt |
Sum received on death of the insured is ALWAYS exempt u/s 10(10D), regardless of premium-to-sum-assured ratio. No exceptions. |
| 4 |
Keyman Insurance Policy |
Sum received under a Keyman Insurance Policy is NOT exempt u/s 10(10D). It is taxable as business income/salary. |
| 5 |
ULIP Premium Threshold (FA 2021) |
For ULIPs issued on/after 01.02.2021: the aggregate annual premium across ALL ULIPs must NOT exceed Rs 2,50,000 for exemption. |
| 6 |
High-Premium LIP (FA 2023) |
For traditional LIPs (non-ULIP) issued on/after 01.04.2023: aggregate annual premium exceeding Rs. 5,00,000, maturity proceeds are taxable. Death claims are still exempt. |
ULIP Taxation Post Finance Act 2021 Regime
The Finance Act 2021 introduced a game-changing amendment effective
01/02/2021. ULIPs with aggregate annual premiums exceeding Rs 250,000 are now treated on par with equity-orientated mutual funds for tax purposes.
The Rs. 2,50,000 Threshold Rule
- Such a limit applies to the AGGREGATE of all ULIP premiums paid by the assessee in a financial year across all policies
- If the aggregate annual premium across all ULIPs issued on/after 01.02.2021 exceeds Rs 250,000, the ENTIRE maturity amount (not just the excess) becomes taxable.
- ULIPS can be clubbed, as premiums below 2.5 lakhs can be exempt under 10(10D) provided that the aggregate does not exceed it.
ULIPS, which are not exempt under section 10(10D), are treated as Capital Assets & hence capital gain will be applicable on maturity & they generally have a long-term nature & are taxable under 112A.
| Fund Type (ULIP) |
Holding Period |
Tax Rate |
Applicable Section |
| ULIP maturity or surrender |
> 12 months |
12.5% above Rs. 1.25L |
Section 112A (LTCG) |
LIP Taxation
Life insurance policy not exempt under section 10(10D) will be taxable under other source under section 56.
Taxable income: Maturity Amount - Premium paid (Exclude 80C deduction if taken in any year)
E.g., Mr A is paying a premium of Rs 250,000 against a Life insurance policy issued on 1-8-2021 (Sum assured: Rs 24 lakhs); the maturity amount received on 19/07/2025 is Rs 30 lakhs. He has also availed 1.5 lakh 80C deduction of LIC premium for 2 FYs.
Solution
As the premium paid is >10% of the sum assured, such an LIP will not be exempt & the amount will be taxable as under the following:
| Particular |
Amount |
| Maturity Amount |
30,00,000 |
| Less: |
|
| Premium paid |
(10,00,000) |
| (250,000*4) |
|
| Deductions Availed |
(3,00,000) |
| IFOS |
17,00,000 |
TDS under Section 194DA
Section 194DA mandates TDS on insurance maturity/surrender proceeds that are taxable (i.e., NOT exempt u/s 10(10D)).
| Parameter |
Details |
| Who Deducts |
Insurance company (at the time of payment) |
| Threshold |
Payment exceeds Rs 100,000 in a financial year to a single payee |
| TDS Rate |
2% of the aggregate amount paid |
| TDS Base |
TDS is on INCOME COMPONENT only, i.e., Amount Received MINUS Total Premiums Paid |
| No TDS if Exempt |
If the policy is exempt u/s 10(10D), NO TDS is deducted u/s 194DA. Death claims are never subject to 194DA TDS. |
| Form 15G / 15H |
Assessee can submit Form 15G (non-senior) / Form 15H (senior citizen) to the insurer to avoid TDS if income is below the taxable limit. Applicable only to taxable receipts. |
| AIS Reporting |
Insurance company reports TDS deducted in Form 26Q (TDS statement). Reflected in AIS under 'TDS on insurance maturity payments'. |
Check list
- Classify the policy correctly
- Apply the right premium threshold
- Determine the head of income
- map to the correct ITR schedule
- Reconcile with AIS
The above checklist ensures accurate compliance and avoids common filing errors or mismatch notices for AY 2026-27.
Khush Trivedi
Jun 24, 2026
Study cafe
AHMEDABAD, Gujarat, India
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