The Income Tax Act provides tax exemption on life insurance maturity proceeds only if certain conditions are met. If those conditions are violated, part or even the entire maturity amount may become taxable, potentially leading to an unexpected tax liability when you file your Income Tax Return (ITR).
Whether you’ve purchased a traditional endowment plan, a high-value life insurance policy, or a Unit Linked Insurance Plan (ULIP), the tax treatment of the maturity proceeds depends on different factors.
As the ITR filing season for AY 2026-27 gathers pace, knowing these exceptions can help you report your income correctly, avoid notices from the Income Tax Department, and prevent last-minute surprises.
5 situations where life insurance maturity proceeds become taxable
According to CA Chandni Anandan, Tax Expert at ClearTax, here are five situations where life insurance maturity proceeds may become taxable, even though many policyholders assume they are fully exempt.
High premium non-ULIPS: The total yearly aggregate premiums for all non-ULIP policies issued on or after April 1, 2023, cannot be more than Rs 5 lakh. Any amount received at maturity beyond the total premiums you paid is taxable.
ULIP premium exceeds the prescribed threshold: For ULIPs, the tax exemption may not apply if the annual premium crosses the threshold specified under the law. In such cases, the maturity proceeds may be taxable. For policies issued on or after February 1, 2021, the maturity or surrender proceeds are only tax-exempt under Section 10(10D) of the Income Tax Act if your total annual premium stays within Rs 2.5 lakh and does not exceed 10% of the sum assured.
For standard insurance policies issued on or after April 1, 2012, the annual premium must not exceed 10% of the actual capital sum assured. The maturity payout is no longer tax-exempt if the premium exceeds this 10% threshold in any given fiscal year. Note for policies issued between April 1, 2003, and March 31, 2012, the threshold is 20%.
Keyman insurance policy proceeds: Maturity or surrender proceeds from a keyman insurance policy are taxable because these policies are treated differently under the tax law.
Policy is assigned or held in a way that changes tax treatment: In some assignment-related cases, the maturity proceeds may become taxable depending on who receives the amount and how the policy is structured. The tax outcome depends on the facts of the case and the applicable provisions.
Policies for disabled dependents: Proceeds received under Section 80U taken specifically for the maintenance of a dependent with a disability are subject to different tax regulations and do not qualify for the standard Section 10(10D) exemption.
What practical checks should policyholders perform before filing their ITR to avoid notices related to life insurance receipts?
Policyholders should first check whether the maturity amount is fully exempt under Section 10(10D) or partly/fully taxable based on the policy conditions.
They should compare the maturity advice with the original policy document, premium receipts, and any TDS reflected in AIS or Form 26AS. It is also important to verify whether the insurer has deducted TDS under Section 194DA and whether the amount reported in AIS matches the actual receipt.
What documents should policyholders retain to substantiate the exempt or taxable status of maturity proceeds?
Policyholders should keep the policy bond, premium payment receipts, maturity or surrender statement from the insurer, TDS certificate if issued, bank credit proof, and any correspondence showing the policy type and issue date, according to Anandan.
If the receipt is exempt, the records should clearly support the Section 10(10D) claim. If taxable, the documents should help establish the amount received, the premium paid, and the net taxable income, if applicable.
How should taxpayers report taxable life insurance maturity proceeds while filing ITR for AY 2026-27?
Taxable life insurance maturity proceeds should be reported in the appropriate income schedule based on the nature of the receipt and the policy category.
If tax has been deducted, the taxpayer should ensure that the credit appears correctly in Form 26AS or AIS and reconcile it with the insurer’s statement.
The key is to report the taxable portion consistently with the policy documents and the TDS information shown in the tax records.
How can taxpayers verify whether TDS has been deducted correctly through Form 26AS or AIS?
Taxpayers should compare the maturity amount shown by the insurer with the TDS entries in Form 26AS and AIS, looking for a matching deductor name, amount paid, and tax deducted.
“If the payout is taxable, Section 194DA may apply, and the TDS should generally align with the insurer’s payment record,” said Anandan.
Any mismatch should be resolved before filing, because incorrect or missing TDS credit can lead to refund delays or notices.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.
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