One of the biggest misconceptions in the insurance industry is “Every amount received from a life insurance policy is tax-free.” Unfortunately, this is not always true. Many policyholders confuse a “DEATH CLAIM” with a “MATURITY CLAIM,” even though rule treats them differently.

Understanding these tax rules can help you avoid unpleasant surprises when your policy matures.

Death Claim vs Maturity Claim – Know the Difference

a) Death Claim

If the life insured passes away during the policy term, the amount paid to the nominee as a death benefit is generally exempt from income tax under section 10(10D) of the Income Tax Act. This exemption continues even after the tax law amendments introduced in Budget 2021 and Budget 2023.

b) Maturity Claim

A maturity claim occurs when the policyholder survives the policy term and receives maturity proceeds, bonuses, loyalty additions, guaranteed additions or surrender value. For maturity proceeds, taxability depends on multiple conditions. This is where many policyholders get confused.

Rule 1 – Premium to Sum Assured Ratio

Historically, tax exemption under section 10(10D) depended upon the relationship between annual premium and sum assured.

If these conditions are breached, maturity proceeds may lose tax-exempt status and become taxable as per applicable income tax provisions

Example 1

Suppose

·       Sum Assured = Rs 10,00,000/-

·       Annual Premium = Rs 1,50,000/-

·       Policy Purchased in 2015

Maximum permissible premium for tax exemption

·       10% of Rs 10,00,000 = Rs 1,00,000/-

Since the premium of Rs 1,50,000/- exceeds the permitted threshold, the maturity amount may not qualify for exemption under Section 10(10D). The death benefit, however, remains exempt.

Rule 2 – Budget 2021 Changes for ULIPs

The Finance Act 2021 introduced major changes for Unit Linked Insurance Plans (ULIPs). For ULIPs issued on or after 1st February 2021, “If the aggregate annual premium exceeds Rs 2.5 Lakh, maturity proceeds may become taxable.”

This includes,

·       Maturity Proceeds

·       Partial Withdrawals

·       Surrender Proceeds

·       Redemptions

The taxation mechanism is broadly aligned with equity-oriented investments under applicable provisions. Important exception is that if the life insured passes away, the death benefit remains exempt under Section 10(10D).

Example 2

Rahul purchased a ULIP on 1st March 2021,

·       Annual Premium = Rs 4,00,000/-

·       Policy Term = 20 years

Since the annual premium exceeds Rs 2.5 lakh, the maturity proceeds received after 20 years may become taxable. However, if Rahul dies during the policy term, the death benefit paid to his nominee remains tax-free.

It is equally important to receive in writing on email the taxation rules from the insurance company regarding ULIP maturity, surrender, discontinuation and withdrawal after the lock-in period is over.

Rule 3 – Budget 2023 Changes for Traditional Life Insurance Products

Applicable for policies issued on or after 1st April 2023, this includes

·       Endowment Plans

·       Money Back Plans

·       Whole Life Plans

·       Guaranteed Savings Plans

·       Other Non-ULIP Traditional Life Insurance Plans

If the aggregate annual premium across such policies exceeds Rs 5,00,000/- per financial year, then the maturity proceeds may become taxable.

Example 3

Priya purchases a traditional guaranteed savings plan in May 2023,

·       Annual Premium = Rs 6,00,000/-

·       Policy Type = Endowment Plan

Since the annual premium exceeds Rs 5,00,000/-, the maturity proceeds may not qualify for exemption under Section 10(10D). If Priya survives the policy term, the maturity amount may be taxable. If Priya dies during the policy term, the death benefit paid to the nominee remains tax-free.

The Death Claim Rule That Never Changed

Many policyholders become worried after reading about Budget 2021 and Budget 2023 amendments. The good news is that “Death Benefit continues to remain exempt,” whether the policy ULIP, Endowment, Money Back, Whole Life or Guaranteed Income plan.

The amount received by the nominee upon the death of the life insured generally remains exempt under Section 10(10D), subject to prevailing tax laws. This is one of the most important distinctions between a death claim and a maturity claim.

The Biggest Mistake Policyholders Make

Many individuals purchase life insurance policies solely because they were told, “THE MATURITY AMOUNT IS COMPLETELY TAX-FREE.” Unfortunately, tax laws have evolved and before purchasing any life insurance product, understand,

·       Tax treatment of maturity proceeds

·       Premium to Sum Assured ratio

·       ULIP taxation rules

·       Traditional policy taxation rules

·       Surrender value implications

·       TDS Provisions

·       Death Claim Taxation

Final Thought

Life insurance and tax planning are no longer as simple as they were a decade ago. Today, the tax treatment of a policy depends upon,

·       Policy issue date

·       Policy type

·       Premium amount

·       Sum Assured

·       Applicable Finance Act provisions

·       Section 10(10D) conditions

The good news is that death benefits generally continue to enjoy tax exemptions. The bad news is that maturity proceeds are no longer automatically tax-free in every case. Before purchasing, surrendering, or investing large amounts into a life insurance policy, discuss the tax implications with a qualified Chartered Accountant, Certified Financial Planner or Insurance Professionals.

When it comes to life insurance, understanding the tax rules is just as important as understanding the policy itself.

References

a) https://cleartax.in/s/life-insurance-taxability

b) https://www.incometaxindia.gov.in/w/tax-benefits-due-to-life-insurance-policy-health-insurance-policy-and-expenditure-on-medical-treatment

c) https://database.taxsutra.com/articles/28292fa81477b2697df0f6b244dec2/expert_article

INSURANCE AWARENESS > INSURANCE IGNORANCE

Helping individuals and families make informed insurance decisions through education, transparency, and awareness.

Last Updated – 05/06/2026
Author Name - Abhishek Borkar

Disclaimer
This article is intended solely for educational and awareness purposes and should not be considered financial, legal, tax, investment, or insurance advice.

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