Tax on life insurance payouts: death benefit, maturity, ₹5 lakh rule and TDS

In India, money paid on the death of the insured person is tax-free for the family, whatever the premium or type of policy (keyman policies taken by a business are an exception). Maturity proceeds are tax-free only if conditions are met: the premium in any year must not exceed 10% of the sum assured (for policies issued from 1 April 2012), and for newer policies the total yearly premium across your policies must stay within a limit, ₹2.5 lakh for ULIPs issued from 1 February 2021 and ₹5 lakh for other policies issued from 1 April 2023. If a maturity is taxable, the insurer deducts TDS at 2% on the income part. From 1 April 2026 these rules are in the Income-tax Act, 2025, which replaced the 1961 Act and renumbered its sections; the familiar names "Section 10(10D)" and "Section 80C" refer to the old Act.

This guide belongs to the overview of life insurance in India. It is general information; check your case with a chartered accountant or on the Income Tax Department website.

A note on the Income-tax Act, 2025

The Income-tax Act, 2025 applies from 1 April 2026 (the tax year 2026-27). It replaced "previous year" and "assessment year" with a single tax year and rearranged the law into new sections and schedules. The government described it as a simplification that broadly keeps the existing tax policy. The exemption for life insurance receipts (old Section 10(10D)), the deduction for premiums (old Section 80C) and the TDS provision on taxable payouts (old Section 194DA) carry on under new section and schedule numbers.

This guide uses the old section numbers because they appear on policy documents, benefit illustrations and older tax certificates. For returns filed for 2026-27 onwards, look up the new references in the Income Tax Department's official mapping of old and new sections. If anything below differs from the new Act's wording, the Act prevails.

Death benefit: tax-free

The sum received on the death of the insured, including bonuses, is exempt in the hands of the nominee or legal heir. The 10% condition and the ₹2.5 lakh and ₹5 lakh premium limits do not apply to death claims. Interest paid by the insurer for delayed settlement is a separate item and may be taxable as interest income.

Maturity proceeds: the conditions

"Actual sum assured" excludes bonuses and the value of any return of premium. The aggregate limits count all such policies on your life together. If you hold several policies and only some fit within the limit, you can choose which ones to treat as exempt.

Worked example 1: the 10% rule

Illustrative. A savings policy issued in 2018 has a premium of ₹60,000 a year and a sum assured of ₹5 lakh. The premium is 12% of the sum assured (60,000 ÷ 5,00,000). The 10% condition fails, so the maturity is not exempt, even though the premium is far below ₹5 lakh. The gain is taxable, and the premium would also not have qualified in full for the old-regime deduction: only premium up to 10% of the sum assured (₹50,000) counted.

Many term plans meet the 10% condition easily: ₹15,000 premium for ₹1 crore cover is 0.15%. And a regular term plan has no maturity value to tax anyway.

Worked example 2: a high-premium policy

Illustrative. A non-linked savings policy issued in June 2023 has a premium of ₹6 lakh a year for 10 years, paying ₹75 lakh at maturity. Total premiums paid: ₹60 lakh. The ₹5 lakh aggregate limit is exceeded, so the maturity is not exempt.

The taxable amount is taxed as income from other sources at your slab rate. The TDS is credited against your final tax, and the rest is paid when you file. If you claimed a deduction for some premiums under the old regime, those premiums cannot be subtracted again.

Worked example 3: a large ULIP

For a ULIP issued from 1 February 2021 where the aggregate premium exceeds ₹2.5 lakh a year, the gain at maturity is taxed as a capital gain. For an equity-oriented ULIP held long term, the treatment follows long-term capital gains on equity: under the rates in force from 23 July 2024, 12.5% on gains above ₹1.25 lakh a year. Check the current rates for the tax year in which you receive the money.

TDS on taxable payouts

When a life insurance payout is not exempt, the insurer deducts TDS at 2% of the income component (the reduced rate applying from 1 October 2024, earlier 5%), usually only if the total paid in the financial year is ₹1 lakh or more. The insurer issues a TDS certificate. Make sure your PAN is updated with the insurer; without it, TDS can be deducted at a higher rate.

Deduction for premiums you pay

Under the old tax regime, premiums for policies on your own life, your spouse's or your children's qualify for the deduction formerly under Section 80C, within the overall limit of ₹1.5 lakh shared with PPF, EPF, ELSS and other items, and only up to 10% of the sum assured for policies issued from 1 April 2012. Under the new tax regime, the default since the 2023-24 changes, this deduction is not available. Do not buy a policy only for the deduction; check first which regime you use. If you also hold a health policy, its deduction is separate.

Checklist before you take a maturity payout

• Note the issue date and annual premium of each policy on your life.
• Check the premium against 10% of the sum assured for every year.
• Add up yearly premiums for ULIPs issued from February 2021 and non-ULIPs issued from April 2023 separately.
• Confirm your PAN and bank details with the insurer.
• Keep the premium receipts to show the cost when calculating taxable income.
• Ask a chartered accountant if the amount is large or several policies are involved.

Premiums on individual policies no longer carry GST; see the GST exemption guide. For whether a high-premium savings policy is worth buying at all, see term vs ULIP vs endowment.

Frequently asked questions

Is the payout from a term plan taxable?

A death claim is tax-free. A regular term plan has no maturity value. For a return-of-premium term plan, check the 10% condition and the aggregate limit; most TROP plans meet the 10% condition because cover is large compared with the premium.

Is a surrender value taxable?

If the policy would not qualify for exemption at maturity, or is surrendered within the minimum period for the old-regime deduction (two years for traditional policies, five years for ULIPs), tax consequences can follow, including reversal of deductions claimed. Check with the insurer's tax certificate and a tax professional.

Do I need to report a tax-free maturity in my return?

Exempt income is generally reported in the exempt income schedule of the return. Check the current return form instructions for the tax year.

Sources

• Income Tax Department — Income-tax Act, 2025, mapping of old and new sections, return forms and TDS rules
• Income Tax e-filing portal — return forms for the tax year, Form 26AS and AIS to check TDS deducted by the insurer
• IRDAI — product information on linked and non-linked policies