Archive / Investment Adviser (Level 2) / Taxation of Other Products
nism-series-xb-section-10-10d-maturity-proceeds-5-lakh-premium-limit[ INVESTMENT ADVISER (LEVEL 2) ]
Under Section 10(10D) of the Income Tax Act, under what conditions are maturity proceeds from traditional life insurance policies issued on or after April 1, 2023 100% TAX-FREE?
[ A ]If annual premium is up to ₹1 Crore.
[ B ]If the aggregate annual premium payable on traditional policies does NOT EXCEED ₹5,00,000 (₹5.00 Lakhs) across all policies, AND annual premium does not exceed 10% of the death Sum Assured (Death benefits remain 100% tax-free without ceiling).[ CORRECT ]
[ C ]All life insurance maturity proceeds are 100% taxable at 50%.
[ D ]Section 10(10D) applies only to foreign citizens.
Takeaway
The correct answer is B: maturity proceeds on post-April-2023 traditional policies stay tax-free under Section 10(10D) only if aggregate annual premium across all such policies is at most ₹5,00,000 AND annual premium doesn't exceed 10% of the death sum assured; death benefits remain fully tax-free regardless.
Derivation
Finance Act 2023 targeted high-premium traditional (non-ULIP) policies that were effectively being used as tax-free investment vehicles rather than genuine risk protection. For policies issued on or after 1 April 2023, if the combined annual premium across all such policies for one person exceeds ₹5 lakh, the maturity proceeds lose the Section 10(10D) exemption and become taxable as capital gains/other income (though the underlying 10%-of-sum-assured premium test from earlier amendments still applies too). Crucially, this cap only affects the maturity/survival benefit -- the death benefit paid to nominees on the life assured's demise remains 100% tax-exempt under Section 10(10D) irrespective of premium size, a distinction the exam frequently tests.
Why the others fail
A — If annual premium is up to ₹1 Crore.
Vastly overstates the ceiling; the actual aggregate annual premium cap for traditional policies is ₹5 lakh, not ₹1 crore.
C — All life insurance maturity proceeds are 100% taxable at 50%.
Wildly incorrect; maturity proceeds are not blanket-taxed at 50% -- exemption or taxability depends on the ₹5 lakh premium and 10%-of-SA tests.
D — Section 10(10D) applies only to foreign citizens.
False; Section 10(10D) applies to all eligible resident policyholders, its conditions are not restricted to foreign citizens.
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