Budget 2023 completely changed the tax treatment of life insurance maturity proceeds. lakhs of policies are maturing every month under the new rules. Here’s exactly how much tax you will pay when your policy matures in FY 2025-26 or later.
What does the law say — Section 10(10D) and older rules
Under the earlier regime, Section 10(10D) of the Income Tax Act, 1961 provided tax exemption on maturity or surrender proceeds from a life insurance policy.
- For policies issued between 1 April 2003 and 31 March 2012, the annual premium should not exceed 20% of the sum assured.
- For policies issued on or after 1 April 2012, the premium must not exceed 10% of the sum assured for the exemption to hold.
If these conditions are met, the maturity proceeds including bonus remain fully exempt from tax.
Recent changes — How 2023 Budget changed the rules
In the 2023 Budget, the government changed the tax treatment for insurance maturity proceeds. For policies (other than ULIPs) issued on or after 1 April 2023, exemption under Section 10(10D) is available only if the aggregate annual premium does not exceed ₹5,00,000 in any financial year.
If yearly premium crosses ₹5 lakh — either for a single policy or combined across multiple policies — the maturity proceeds will be taxable as “income from other sources.” Note: The new rules do not apply to payouts received on the death of the insured — those remain tax free for the nominee.
ULIPs, single-premium and other special policies:
For a single-premium life insurance policy issued after 2012, maturity proceeds remain exempt only if the single premium does not exceed 10 % of the sum assured. If that 10 % threshold is breached, then only the gain (maturity minus premium) is taxable, not the entire proceeds.
Regarding Unit Linked Insurance Plans (ULIPs): these were already treated differently. From Feb 2022, a ULIP’s maturity gains may be taxable if annual premium exceeds ₹2.5 lakh. Thus, for ULIPs and high-premium plans, you need to check both issuance date and premium amount carefully.
How taxation works — What gets taxed and how much
When proceeds become taxable, the difference between maturity amount (including bonuses) and total premiums paid is treated as income. The amount will be added to your total taxable income and taxed as per your income-tax slab. For example, recently the government clarified that if you pay more than ₹5 lakh in premiums in a year, maturity proceeds will be taxable.
As of 2023, many traditional endowment or money-back policies bought after 1 April 2023 may therefore lose their tax-free maturity status.
Conclusion:
Tax on insurance policy maturity proceeds depends heavily on when the policy was issued and how much premium you pay. Under the revised 2023-rules, high-premium policies may lose the long-valued tax-free benefit. Always check the issue date and premium amount before buying. Old policies remain golden — never surrender them early! Plan your premiums wisely today to save tomorrow.
– Ketaki Dandekar (Team Arthology)
Read more about Tax on Insurance Policy Maturity Proceeds here – https://cleartax.in/insurance-taxability