Published 9 May 2026
Sub-clause (10D) of section 10 of the Income-tax Act, 1961 as further amended by the Finance Act, 2023 -- the new Rs 5 lakh annual-premium ceiling for non-ULIP life insurance policies issued on or after 1 April 2023; the policy-aggregation rule; the consequential taxation of maturity proceeds under Income from Other Sources; the historical 10%-of-sum-assured ratio test continuing to operate; and the practitioner's framework for HNIs holding traditional endowment / money-back / whole-life policies
Taxpayer Brief
Where the Finance Act, 2021 closed the high-premium ULIP route through the rupees two lakh fifty thousand cap (HNI-06), the Finance Act, 2023 extended a similar treatment to traditional non-ULIP life insurance policies through the rupees five lakh annual-premium ceiling. The cap is higher than the ULIP cap because traditional policies typically have lower investment returns and serve a more dominant insurance function. From 1 April 2023 onwards, traditional life insurance policies (endowment, money-back, whole-life, term-with-return-of-premium) with annual premium exceeding rupees five lakh LOSE the section 10(10D) exemption -- maturity proceeds are taxable. The aggregation rule applies across all such policies of the same assessee. The historical 10%-of-sum-assured ratio test continues to operate alongside. This article walks through the framework, the worked computation, and the strategic positioning.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Pre-1 April 2023 endowment policy | Low | Grandfathered; section 10(10D) preserved |
Post-1 April 2023 traditional policy with annual premium up to Rs 5L | Medium | Within cap; exemption preserved |
Post-1 April 2023 traditional policy with annual premium above Rs 5L | High | Taxable maturity; planning needed |
Multiple traditional policies with aggregate above Rs 5L | Very High | Aggregation rule applies |
1. The Statutory Framework
Provision | Effect |
|---|---|
Sub-clause (10D) of section 10 baseline | Life insurance maturity proceeds exempt subject to (a) 10% sum-assured premium-ratio test; (b) policy issued conditions |
Sixth proviso inserted by Finance Act, 2023 (effective 1 April 2023 onwards) | Non-ULIP life insurance with annual premium exceeding Rs 5 lakh is OUTSIDE section 10(10D); maturity proceeds taxable |
Aggregation rule under sixth proviso | Where the assessee holds multiple non-ULIP life insurance policies, the annual-premium aggregate across all such policies is the test |
Pre-1 April 2023 policies | Grandfathered -- continue to enjoy section 10(10D) exemption regardless of premium quantum (subject to the 10% sum-assured ratio test) |
10% sum-assured premium-ratio test | Continues to operate -- annual premium must not exceed 10% of sum assured (12% for disabled persons / 15% for specified diseases) |
Tax treatment of non-exempt traditional policies | Maturity proceeds taxable as Income from Other Sources at slab rate; less attractive than capital-gain rate applicable to non-exempt ULIPs |
Why the Rs 5 lakh cap is higher than the Rs 2.5 lakh ULIP cap The Rs 5 lakh threshold for traditional policies vs Rs 2.5 lakh for ULIPs reflects two factors -- (i) Traditional policies typically have lower investment returns (4-6% per annum) so the same premium produces less tax-shielded growth than a ULIP at 8-12% per annum; (ii) Traditional policies have a higher mortality / insurance-cost component, so the savings element is typically smaller. The legislature judged the higher Rs 5 lakh threshold appropriate. For HNI assessees this is structurally favourable -- a couple paying Rs 4.5 lakh annual premium each on separate traditional endowment policies remains within the cap. |
2. The Tax Treatment of Non-Exempt Traditional Policies
Where a non-ULIP life insurance policy fails section 10(10D) (post-2023 with annual premium above Rs 5 lakh), the maturity proceeds are taxable in the hands of the recipient under section 56(2) of the Income-tax Act, 1961 as Income from Other Sources at slab rate. This is materially less attractive than the ULIP non-exempt treatment (capital-gain at 12.5% post 23 July 2024) because the slab-rate treatment for an HNI in the 30%-bracket plus surcharge produces an effective tax of 35-39% on the entire maturity proceeds (including the principal-equivalent component, with no cost-deduction in many cases). The structural disincentive for HNIs to purchase high-premium traditional policies post 1 April 2023 is therefore strong.
3. Worked Example -- HNI Considering High-Premium Endowment Policy
Mr. Sanjay, age 45, in the 30% bracket, is considering purchasing an LIC Jeevan Saral 25-year endowment policy with annual premium Rs 8 lakh, sum assured Rs 1 crore (well within the 10% sum-assured premium-ratio test). Issue date 2025 (post 1 April 2023). The policy projects a maturity benefit of Rs 3.2 crore at age 70 (25-year term).
Computation | Pre-1 April 2023 Policy (Hypothetical) | Post-1 April 2023 Policy (Mr. Sanjay's actual) |
|---|---|---|
Annual premium | Rs 8 lakh | Rs 8 lakh |
Section 10(10D) Rs 5 lakh cap (post-1-April-2023 only) | Not applicable (pre-2023) | Failed -- premium Rs 8 lakh > Rs 5 lakh |
10% sum-assured ratio test | Premium Rs 8 lakh / Sum Assured Rs 1 crore = 8% -- within | Same; within |
Section 10(10D) Status | Exempt (subject to 10% ratio passing) | FAILED -- Rs 5 lakh cap breach |
Maturity proceeds at age 70 | Rs 3.2 crore (illustrative) | Rs 3.2 crore |
Tax treatment | Tax-free | Taxable as Income from Other Sources at slab rate |
Tax at 30% slab + 4% Cess on Rs 3.2 crore (assuming HNI top bracket) | Nil | Approximately Rs 1.10 crore |
Net post-tax maturity | Rs 3.2 crore | Rs 2.1 crore |
The structural disadvantage of post-2023 high-premium traditional policies Mr. Sanjay's policy, post-1-April-2023, will deliver Rs 1.10 crore less of after-tax value than the same policy issued pre-1-April-2023. The structural disincentive is severe. Any HNI considering a post-1-April-2023 traditional life insurance policy with premium above Rs 5 lakh should run the post-tax-yield analysis. In nearly every case, the same premium deployed in -- (i) a Rs 1 crore term insurance for the protection element + (ii) the Rs 7 lakh per year of savings premium redirected to equity-oriented mutual funds for the savings element -- produces materially better post-tax outcomes. |
4. The 10% Sum-Assured Ratio Test -- Continuing Operation
Even where a traditional policy is within the post-2023 Rs 5 lakh annual-premium cap, the historical 10% sum-assured premium-ratio test continues to operate. A policy with annual premium Rs 4 lakh and sum assured Rs 30 lakh has premium-to-sum-assured ratio of 13.3% -- failing the 10% test (despite being within the Rs 5 lakh cap). The maturity proceeds remain non-exempt. The 10% test (12% for disabled persons under section 80U; 15% for specified diseases under section 80DDB) is the older anti-investment-product layer; the Rs 5 lakh cap is the newer per-assessee high-premium layer. Both must be passed for section 10(10D) exemption.
5. Anticipatory Legal Analysis -- The Implementation Issues
Prospective Interpretation The Finance Act, 2023 sixth proviso is sufficiently new that no Tribunal jurisprudence has yet emerged. Likely interpretive issues -- (i) Whether 'annual premium' includes service tax / Goods and Services Tax on the premium component; the structural argument is that GST is a statutory addition outside the premium calculation, but the Department may take a contrary view. (ii) Treatment of survival benefits paid during the policy term in money-back policies -- whether these are 'maturity proceeds' for the proviso test or partial-withdrawals; the likely interpretation is that survival benefits ARE within the proviso scope. (iii) Treatment of bonus declarations during policy term -- whether bonus accrual is 'income' on accrual basis or only on receipt; the structural argument favours receipt-basis taxation aligned with the sub-clause (10D) framework. The practitioner's discipline is to preserve documentation pending judicial guidance. |
6. Strategic Implications
- Pre-1-April-2023 traditional policies are grandfathered -- preserve and continue funding.
- For protection element only -- prefer term insurance (no maturity benefit; pure protection; lower premium).
- Avoid post-1-April-2023 traditional policies with annual premium above Rs 5 lakh -- the maturity proceeds become Income from Other Sources at slab rate, far worse than capital-gain treatment.
- Where the savings element is the goal, redirect surplus premium to direct equity-oriented mutual funds (no Rs 5 lakh cap; section 112A 12.5% LTCG rate; full liquidity).
- For couples -- structure separate policies for each spouse to use the per-assessee Rs 5 lakh cap; aggregate up to Rs 10 lakh per year of family premium with section 10(10D) preserved.
7. Key Takeaways
- Finance Act, 2023 sixth proviso to sub-clause (10D) of section 10 effective 1 April 2023 -- non-ULIP life insurance policies with annual premium above Rs 5 lakh lose the section 10(10D) exemption.
- Aggregation across multiple non-ULIP policies of the same assessee.
- Pre-1-April-2023 policies grandfathered.
- 10% sum-assured premium-ratio test continues to operate alongside the Rs 5 lakh cap.
- Non-exempt traditional policies taxed as Income from Other Sources at slab rate -- worse treatment than non-exempt ULIPs (capital-gain rate).
- Strategic shift -- term insurance for protection + equity-oriented mutual funds for savings; abandon high-premium endowment / money-back / whole-life as savings vehicles for HNIs.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.