Taxation of Life Insurance: 10(10D), 194DA and the Insurer
Tax touches the insurer, the premium and the payout. Here is each layer, with the old and new section numbers.
Life insurance meets the Income Tax Act, 1961 at three points. The insurer pays tax on the profit of its life business. The policyholder may get a deduction for premium paid. And when money comes out of the policy, as a maturity, surrender or death claim, the law decides whether it is tax-free and whether the insurer must deduct tax at source (TDS) before paying.
The two rules people look up most are Section 10(10D), which makes most policy payouts tax-free, and Section 194DA, which makes the insurer deduct tax from payouts that are not. Both are covered in detail below.
From 1 April 2026, the Income-tax Act, 2025 replaces the 1961 Act. The rules carry over, but the section numbers change: 10(10D) is now Schedule II, Table Sl. No. 2, and 194DA is now Section 393(1), Table Sl. No. 8(i). The older numbers still apply to the years up to 31 March 2026, and they are the ones most people search for.
Tax figures change with almost every Budget. This page gives each rule with the date or section the sources attach to it, and leaves out rates the sources disagree on. Check the current Finance Act before relying on any rate.
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Old and New Section Numbers (Income-tax Act, 2025)
The 2025 Act came into force on 1 April 2026 and repealed the Income Tax Act, 1961.
Life insurance payouts exempt
Income Tax Act, 1961
Section 10(10D)
Income-tax Act, 2025
Section 11, Schedule II, Table Sl. No. 2
TDS on non-exempt payouts
Income Tax Act, 1961
Section 194DA
Income-tax Act, 2025
Section 393(1), Table Sl. No. 8(i)
TDS on agents' commission
Income Tax Act, 1961
Section 194D
Income-tax Act, 2025
Section 393(1), Table Sl. No. 1(i)
Deduction for life insurance premium
Income Tax Act, 1961
Section 80C
Income-tax Act, 2025
Section 123, Schedule XV, para 1(a)
Deduction for an insurer pension plan
Income Tax Act, 1961
Section 80CCC
Income-tax Act, 2025
Section 123, Schedule XV, para 1(x)
Insurer's life business profit
Income Tax Act, 1961
Section 44, First Schedule
Income-tax Act, 2025
Section 55, Schedule XIV
| Rule | Income Tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Life insurance payouts exempt | Section 10(10D) | Section 11, Schedule II, Table Sl. No. 2 |
| TDS on non-exempt payouts | Section 194DA | Section 393(1), Table Sl. No. 8(i) |
| TDS on agents' commission | Section 194D | Section 393(1), Table Sl. No. 1(i) |
| Deduction for life insurance premium | Section 80C | Section 123, Schedule XV, para 1(a) |
| Deduction for an insurer pension plan | Section 80CCC | Section 123, Schedule XV, para 1(x) |
| Insurer's life business profit | Section 44, First Schedule | Section 55, Schedule XIV |
Tax on the Life Insurer
- Section 44 and the First Schedule
- The profits and gains of a life insurance business are computed under the rules in the First Schedule to the Income Tax Act, not under the ordinary rules for business income.
- Actuarial surplus as the base
- Taxable profit is based on the surplus or deficit disclosed by the actuarial valuation made under the Insurance Act.
- No second deduction for expenses
- Management expenses are already charged in the revenue account before the surplus is struck, so they are not deducted again for tax.
- AS 22
- The ICAI accounting standard on Accounting for Taxes on Income, covering current and deferred tax. ICAI standards govern insurers subject to IRDAI's modifications.
Policyholder Tax Rules at a Glance
80C
What it does
Deduction for life insurance premium on your own life, spouse or child (individuals and HUFs)
Key condition
Up to ₹1.5 lakh a financial year, Old Tax Regime only, insurer approved by IRDAI
80D
What it does
Deduction for premium on critical illness or health riders attached to a life policy
Key condition
Limit depends on age and category
10(10D)
What it does
Maturity and death benefits generally tax-free
Key condition
Premium-to-sum-assured limits must be met (death benefit exempt regardless)
194DA
What it does
TDS on life insurance payouts to residents that are not exempt under 10(10D)
Key condition
Only on the income part (payout less premiums); 2% under the 2025 Act; no TDS if the year's total is within ₹1,00,000
194D
What it does
TDS on commission paid to insurance agents
Key condition
Resident payees; non-residents fall under Section 195
| Section | What it does | Key condition |
|---|---|---|
| 80C | Deduction for life insurance premium on your own life, spouse or child (individuals and HUFs) | Up to ₹1.5 lakh a financial year, Old Tax Regime only, insurer approved by IRDAI |
| 80D | Deduction for premium on critical illness or health riders attached to a life policy | Limit depends on age and category |
| 10(10D) | Maturity and death benefits generally tax-free | Premium-to-sum-assured limits must be met (death benefit exempt regardless) |
| 194DA | TDS on life insurance payouts to residents that are not exempt under 10(10D) | Only on the income part (payout less premiums); 2% under the 2025 Act; no TDS if the year's total is within ₹1,00,000 |
| 194D | TDS on commission paid to insurance agents | Resident payees; non-residents fall under Section 195 |
Section 10(10D) Conditions by Date of Issue
Section 10(10D) exempts any sum received under a life insurance policy, including bonus. Except for a death claim, the policy must meet the condition for the period it was issued in. This is the table the Income-tax Act, 2025 sets out in Schedule II, Sl. No. 2.
| Policy issued | Condition for a tax-free payout |
|---|---|
| 1 April 2003 to 31 March 2012 | Premium to sum assured ratio up to 20% |
| 1 April 2012 to 31 March 2013 | Premium to sum assured ratio up to 10% |
| 1 April 2013 to 31 January 2021 | Up to 15% for a special policy; up to 10% for others |
| 1 February 2021 to 31 March 2023 | ULIP: 15% or 10% ratio, and aggregate premium on all such ULIPs up to ₹2,50,000 in any year. Other policies: 15% or 10% ratio |
| On or after 1 April 2023 | ULIP: 15% or 10% ratio, and aggregate ULIP premium up to ₹2,50,000. Other policies: 15% or 10% ratio, and aggregate premium up to ₹5,00,000 |
Section 10(10D): The Terms That Decide It
- Premium to sum assured ratio
- The highest percentage that the annual premium payable bears to the actual capital sum assured, at any point during the term of the policy. One high year is enough to fail the test.
- Actual capital sum assured
- The minimum amount assured on the insured event at any time during the term, ignoring premiums agreed to be returned and any bonus over the sum actually assured.
- Special policy
- A policy on the life of a person with a disability or severe disability, or one suffering from a disease or ailment specified in the rules. It gets the 15% ratio instead of 10%.
- Aggregate premium
- The ₹2,50,000 (ULIP) and ₹5,00,000 (other policies) limits add up the premium on all such policies of the person in any year of their term, not one policy alone.
- Keyman insurance policy
- A policy one person takes on the life of another who is or was its employee or connected with its business, including such a policy later assigned. Its proceeds are never exempt.
When Section 10(10D) Does Not Apply
- check_circlePremium above the 10% or 20% cap (as applicable): the proceeds are taxed.
- check_circlePolicies other than ULIPs issued on or after 1 April 2023 with aggregate annual premium above ₹5 lakh: no 10(10D) exemption on maturity.
- check_circleULIPs issued on or after 1 February 2021: maturity is fully exempt only if total annualised premium is up to ₹2.5 lakh. Top-up and rider premiums count toward the limit. Above it, gains are taxed as capital gains.
- check_circleULIPs issued before 1 February 2021 stay exempt even above ₹2.5 lakh if the other 10(10D) conditions are met.
- check_circleKeyman insurance proceeds are taxable.
- check_circleA death benefit is exempt in the nominee's hands whatever the premium conditions.
- check_circlePolicies issued on or after 1 April 2025 by an International Financial Services Centre (IFSC) insurance office: the ₹2.5 lakh and ₹5 lakh aggregate limits do not apply.
- check_circleThe exemption is not on the new regime's list of withdrawn exemptions, so it applies under both the old and new tax regimes.
Surrender
- check_circleTraditional policy: surrender value is exempt only if premiums were paid for at least two years.
- check_circleULIP: surrender before the 5-year lock-in makes the whole surrender value taxable.
- check_circle80C deductions claimed earlier under the old regime may be reversed in the year of surrender.
Section 194DA: How the Insurer Deducts TDS on a Payout
Section 194DA makes the insurer deduct tax at source from a policy payout that is not exempt under 10(10D). Under the Income-tax Act, 2025 the same rule is Section 393(1), Table Sl. No. 8(i): 2% on the income part, with a ₹1,00,000 threshold.
- 1
Check the payee and the payout
194DA covers maturity, surrender and survival benefits paid to resident individuals. Death benefits are fully exempt, with no TDS. Amounts under Section 80DD(3) are also outside it.
- 2
Check the exemption
If the payout is exempt under 10(10D), or the total payable in the financial year is within ₹1,00,000, no tax is deducted.
- 3
Work out the income part
Since the amendment effective 1 September 2019, TDS is deducted only on the income component: the payout less the premiums paid.
- 4
Deduct at the 2% rate
Under the 2025 Act, tax is deducted at 2% of the income part, at the time of credit or payment, whichever is earlier. The rate rises to 20% if the payee does not furnish a PAN.
- 5
Accept a nil-tax declaration
A resident individual whose estimated total income for the year is nil can give the insurer a written declaration to that effect (Section 393(6) of the 2025 Act), and no tax is deducted.
- 6
Deposit and report
TDS is deposited by the 7th of the next month (30 April for March payouts), reported in the quarterly Form 26Q, and Form 16A is issued to the payee.
Exam Traps
194DA is TDS on policy payouts; 194D is TDS on agents' commission. The premium cap is 10% for policies from 1 April 2012, 20% for policies before that, and 15% for disability or specified-disease cases from 1 April 2013. The ₹5 lakh rule (from 1 April 2023) is for non-ULIP policies; the ₹2.5 lakh rule (from 1 February 2021) is for ULIPs. A life insurer's profit is taxed under Section 44 and the First Schedule, not Sections 80C, 10(10D) or 115JB. Since 1 April 2026, 10(10D) is Schedule II Sl. No. 2 and 194DA is Section 393(1) Sl. No. 8(i) of the Income-tax Act, 2025. GST is a separate tax: individual life policies are exempt from 22 September 2025.
FAQs
How is a life insurance company's profit taxed?expand_more
Under Section 44 of the Income Tax Act, 1961, which sends the computation to the First Schedule. The base is the surplus or deficit shown by the actuarial valuation, not ordinary business profit.
Is the maturity amount of a life policy tax-free?expand_more
Generally yes under Section 10(10D), if the premium stayed within the cap (10% of sum assured for policies from 1 April 2012). Non-ULIP policies issued on or after 1 April 2023 with aggregate premium above ₹5 lakh, and ULIPs issued on or after 1 February 2021 with premium above ₹2.5 lakh, lose the exemption.
Is a death claim taxable?expand_more
No. The death benefit is exempt in the nominee's hands irrespective of the 10(10D) premium conditions, and no TDS is deducted under 194DA.
Can I claim 80C for my parents' policy?expand_more
The sources list your own life, spouse and children (dependent or not, minor or major, married or single). The deduction is available only under the Old Tax Regime.
What is the TDS threshold under Section 194DA?expand_more
₹1,00,000 in a financial year. If the total payable is within that, no TDS is needed.
What is Section 10(10D) of the Income Tax Act?expand_more
The exemption for any sum received under a life insurance policy, including bonus. A death claim is always exempt; maturity and surrender proceeds are exempt if the policy meets the premium to sum assured ratio and, for newer policies, the aggregate premium limits. Keyman policies never qualify.
Is the LIC maturity amount taxable?expand_more
Not if the policy meets Section 10(10D). For a policy issued from 1 April 2012, the annual premium must stay within 10% of the sum assured (15% for a special policy), and for non-ULIP policies issued from 1 April 2023 the aggregate premium must be within ₹5 lakh. If it fails, the proceeds are taxed, and the insurer deducts TDS under 194DA on the income part.
Can I claim Section 10(10D) under the new tax regime?expand_more
Yes. The new regime withdraws 80C and most deductions, but the life insurance exemption (Schedule II of the 2025 Act) is not on its list of withdrawn exemptions.
What is the TDS rate under Section 194DA?expand_more
Under the Income-tax Act, 2025, 2% on the income comprised in the payout, that is the amount paid less the premiums paid. It is 20% if the payee gives no PAN.
What are Section 10(10D) and 194DA called in the Income-tax Act, 2025?expand_more
10(10D) is Schedule II, Table Sl. No. 2 (read with Section 11). 194DA is Section 393(1), Table Sl. No. 8(i). The new numbers apply from the tax year starting 1 April 2026.
Is there GST on life insurance premium?expand_more
Not on individual policies from 22 September 2025. Group policies remain taxable.
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