Life Insurance Maturity Tax for AY 2026-27: Section 10(10D), Premium Limits and ITR Reporting

For income earned from 1 April 2025 to 31 March 2026, life insurance maturity, surrender and other policy payments are governed by the Income-tax Act, 1961 and reported for AY 2026-27. Many policy proceeds are exempt, but the result depends on the policy type, issue date, premium history and reason for payment.

Do not assume that a payout is tax-free just because it came from a life insurer, or that the amount credited to your bank account is automatically taxable income. Check the conditions in Section 10(10D) and the rules for any non-exempt proceeds.

When are life insurance proceeds exempt under Section 10(10D)?

Section 10(10D) generally exempts sums received under a life insurance policy, including eligible bonuses, if the statutory conditions are met. The exemption is subject to exclusions and premium tests. Keyman insurance proceeds and certain amounts connected with a policy under Section 80DD are not covered by the general exemption.

For most policies, the premium payable in any policy year must also stay within a specified proportion of the policy’s actual capital sum assured. Separate annual premium caps apply to certain newer ULIPs and non-ULIP policies. These are separate tests: satisfying one does not automatically satisfy the other.

Section 10(10D) rules by policy issue date

The actual capital sum assured is not necessarily the maturity value or the projected amount in a policy illustration. Review the policy schedule and the statutory definition. The premium-ratio test and the high-premium cap may both apply.

The ₹2.5 lakh ULIP cap and ₹5 lakh non-ULIP cap apply to the respective categories; they are not a single combined limit. They do not automatically make proceeds from older policies taxable. Check the issue date and whether the product is a ULIP.

How the premium caps work

For a ULIP issued on or after 1 February 2021, the exemption may not apply if the premium payable in any policy year exceeds ₹2.5 lakh. If you hold more than one ULIP in the relevant group, the aggregation rules may affect which policy proceeds qualify.

For a non-ULIP policy issued on or after 1 April 2023, the corresponding limit is ₹5 lakh. Premiums across multiple policies in the relevant group may have to be considered together. A policy’s proceeds do not qualify merely because that individual policy’s premium is below ₹5 lakh.

Example: Suppose two non-ULIP policies issued after 1 April 2023 have annual premiums of ₹3 lakh and ₹2.5 lakh. Their combined premium is ₹5.5 lakh. You cannot assume that both policies qualify for exemption; apply the aggregation and selection rules to the full policy facts.

These premium caps generally do not restrict an amount received on the death of the insured. However, statutory exclusions such as Keyman policy treatment must still be checked. A maturity or surrender payment made while the insured is alive does not become a death benefit because the policyholder dies later.

How taxable maturity proceeds are calculated

If a non-ULIP payout is not exempt under Section 10(10D), the entire gross receipt is not necessarily taxable. Under Section 56(2)(xiii), the taxable amount is generally the sum received, including bonus, minus premiums paid during the policy term that were not claimed as a deduction under another provision. A premium already deducted cannot also reduce the taxable surplus.

Example: If the relevant non-ULIP payout is ₹30 lakh and eligible premiums paid total ₹20 lakh, the initial surplus is ₹10 lakh, assuming those premiums were not claimed as deductions. Apply the prescribed computation to the policy history and return facts before reporting it.

The taxable amount is generally reported under “Income from Other Sources.” Do not report the whole payout as taxable without checking the computation, but do not omit taxable income merely because the insurer did not deduct tax.

Tax treatment of a taxable ULIP

A taxable ULIP should not automatically be treated like a taxable non-ULIP policy. For AY 2026-27, where Section 45(1B) applies to a specified high-premium ULIP that fails the Section 10(10D) conditions, the receipt is generally dealt with under the capital-gains provisions and computed under Rule 8AD.

Later amendments to ULIP taxation apply from 1 April 2026 and concern receipts under the new tax-year framework. They do not change the law for income earned in FY 2025-26. Check the notified AY 2026-27 ITR utility and the exact reason the ULIP failed the exemption test.

Is TDS deducted from life insurance maturity proceeds?

Under Section 194DA, an insurer generally deducts TDS at 2% from the income component of a taxable life insurance payment to a resident. The TDS threshold is generally met when the amount or aggregate amounts paid or payable under the policy during the financial year is ₹1 lakh or more. No Section 194DA TDS is required on a sum exempt under Section 10(10D).

TDS is a tax credit, not the final tax. Match the insurer’s certificate and the credit shown against your PAN in Form 26AS or the portal’s tax-credit information. A non-resident payment may be subject to different withholding rules, including Section 195.

Section 80C deduction for life insurance premiums

The deduction under Section 80C and the exemption under Section 10(10D) are separate tests. For AY 2026-27, Section 80C is generally available under the old tax regime, not the default new regime. The combined limit for Sections 80C, 80CCC and 80CCD(1) is ₹1.5 lakh.

Life insurance premiums may qualify under Section 80C if the policy and payment meet the conditions. The premium counted for deduction is generally subject to a percentage-of-sum-assured limit: commonly 20% for policies issued before 1 April 2012 and 10% for policies issued on or after that date. A 15% limit may apply to certain qualifying policies issued from 1 April 2013 for a person with a specified disability or disease.

Term insurance premiums may qualify if the conditions are met, although a standard term policy usually has no maturity payout. Section 10(10D) exemption does not itself make a premium deductible, and a Section 80C claim does not guarantee that a future payout will be exempt. For the combined deduction rules, see TaxClear’s Section 80C guide for AY 2026-27.

How to report a payout in your ITR

First determine whether the payment is exempt, taxable as other-source income, or taxable under the capital-gains rules for a specified ULIP. Then use the schedule and fields in the AY 2026-27 return utility.

• Report a taxable non-ULIP surplus under “Income from Other Sources.”
• Report a taxable ULIP amount under the capital-gains schedule when Section 45(1B) applies, following the current form instructions.
• Claim TDS only to the extent it appears in your tax-credit records and is linked to your PAN.
• Enter an exempt receipt in the appropriate exempt-income field if the return utility requires it.

ITR-1 may be available in a simple case if the income type and all other eligibility conditions are met. ITR-2 is generally relevant where you have capital gains but no business or professional income; ITR-3 may apply if you have business or professional income. Check the AY 2026-27 form instructions before filing. TaxClear’s online ITR filing guide explains the filing process.

Use the return deadline that applies to your filing category. An exempt receipt, taxable income and tax credit are separate entries; reconcile each one rather than treating the insurer’s net payment as the tax figure.

Records to keep

Keep documents that show the policy terms, premium tests and payout calculation:

• Policy schedule, bond, endorsements and amendments.
• Premium statements and proof of payments for each policy year.
• Maturity, surrender or claim statement showing the payout and bonus.
• Insurer’s taxable-income calculation and TDS certificate, if issued.
• Form 26AS or other tax-credit information and bank statement.
• Section 80C records showing any premium deduction claimed.
• Policy and premium details for other ULIPs or non-ULIP policies in the same aggregation group.
• ITR acknowledgement and your calculation of taxable or exempt income.

Common mistakes to avoid

• Assuming every life insurance maturity amount is tax-free.
• Applying the ₹2.5 lakh ULIP cap to non-ULIP policies, or the ₹5 lakh non-ULIP cap to ULIPs.
• Checking only the premium for the year the policy matured instead of each relevant policy year.
• Ignoring the aggregation rule for multiple newer policies.
• Claiming a premium deduction and also using that premium to reduce the taxable surplus.
• Treating Section 194DA TDS as the final tax or applying 2% to the full payout.
• Reporting taxable ULIP proceeds as if they were non-ULIP proceeds.

Frequently asked questions

Are all life insurance maturity proceeds tax-free?

No. Section 10(10D) has policy-specific conditions, premium tests and exclusions. Check the policy type, issue date and premium history.

Does the ₹5 lakh limit apply to every life insurance policy?

No. It applies to qualifying non-ULIP policies issued on or after 1 April 2023. A separate ₹2.5 lakh test applies to qualifying ULIPs issued on or after 1 February 2021.

Is a death benefit taxable if the policy premium exceeded a cap?

The premium-ratio and specified high-premium limits generally do not disqualify a death benefit, but other statutory exclusions still need review.

Is 2% TDS under Section 194DA my final tax?

No. It is a credit against your tax liability. The final tax depends on the taxable amount and your overall income.

Can I claim life insurance premiums under Section 80C in the new regime?

Generally no. Section 80C is not available under the default new tax regime for AY 2026-27. Eligibility under the old regime remains subject to the conditions and combined limit.

Do I need to report an exempt policy payout?

Follow the AY 2026-27 ITR instructions. If the return asks for exempt-income details, report it in the relevant field and keep the policy documents.