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The 2-Minute Summary
Most life insurance maturity proceeds are tax-free. TDS does not apply to them. The provision under Sl. No. 8(i) only applies to payouts that are taxable, and even then, TDS is applied only on the income (profit) portion, not on the full maturity amount. A life insurance payout becomes taxable when the annual premium exceeds 10% of the sum assured (for policies issued after 1st April 2012). High-premium ULIPs and investment-oriented plans often fall into this category.
Example: Anita’s ULIP matures and she receives Rs. 8 lakh. The total premium she paid was Rs. 6 lakh. Since her annual premium was more than 10% of the sum assured, this payout is taxable. The income portion is Rs. 8 lakh minus Rs. 6 lakh = Rs. 2 lakh. TDS at 2% = Rs. 4,000 is deducted on the Rs. 2 lakh income. Not on the full Rs. 8 lakh.
Under Income Tax Act 1961: Section 194DA of the Income Tax Act 1961. Now Section 393(1) Sl. No. 8(i) under the 2025 Act. Rate and threshold unchanged.
At a Glance
| Item | Details |
| New Act Reference | Section 393(1), Sl. No. 8(i) of Income Tax Act 2025 |
| Old Act Reference | Section 194DA of Income Tax Act 1961 |
| Who Deducts | Any person (the insurance company) |
| TDS Rate | 2% on the income comprised in the sum paid |
| Threshold | Rs. 1,00,000 aggregate payment in the Tax Year |
| Applies to | Only taxable payouts; exempt payouts have no TDS |
| Form for TDS Certificate | Form 16A |
When is a Life Insurance Payout Taxable
Under Schedule II of the Income Tax Act 2025 (old Section 10(10D)), a life insurance payout is exempt from tax if the annual premium does not exceed the prescribed percentage of the sum assured. If it does, the payout is taxable.
| Policy Issue Date | Premium Threshold for Exemption |
| On or before 31st March 2012 | Premium not exceeding 20% of sum assured |
| 1st April 2012 to 31st March 2023 | Premium not exceeding 10% of sum assured |
| On or after 1st April 2023 | Exempt only if sum assured is up to Rs. 5 lakh; above Rs. 5 lakh sum assured, taxable regardless |
For death claims, the payout is always fully exempt regardless of the premium ratio. TDS under Sl. No. 8(i) does not apply on death claims.
TDS Only on Income Portion
Even for taxable payouts, TDS applies only on the income (gain) comprised in the sum paid, not the total amount received. The income is the excess of what you receive over what you paid as premiums.
Example: Suresh paid total premiums of Rs. 4 lakh over the policy term. He receives Rs. 6 lakh on maturity. The payout is taxable (premium exceeded 10% of sum assured). Income portion = Rs. 6 lakh minus Rs. 4 lakh = Rs. 2 lakh. TDS of 2% applies only on Rs. 2 lakh = Rs. 4,000.
The Rs. 1 Lakh Threshold
TDS applies only when the aggregate of taxable insurance payouts in the Tax Year exceeds Rs. 1 lakh. Below Rs. 1 lakh, no TDS is required even if the payout is technically taxable.
The Rs. 1 lakh threshold is on the total payout amount, not on the income portion. So if you receive a taxable payout of Rs. 90,000 (below Rs. 1 lakh), no TDS is deducted even if Rs. 30,000 of that is income.
Practical Compliance Checklist
- If you have a ULIP or high-premium insurance plan: Check whether your annual premium exceeds 10% of the sum assured. If yes, the maturity proceeds will be taxable and TDS will apply.
- If you receive a taxable insurance payout: The insurer will deduct 2% TDS on the income portion. Obtain Form 16A. Declare the income under Income from Other Sources in your ITR and pay any balance tax.
- If your payout is below Rs. 1 lakh: Even if taxable, no TDS is deducted. You are still required to declare the income and pay tax when filing your ITR.
- If this is a death claim: The payout is fully exempt. No TDS applies and no income needs to be declared.
Most traditional LIC endowment and term plans have low premiums relative to sum assured and remain fully exempt. The TDS provision under Sl. No. 8(i) primarily affects ULIPs, single-premium plans, and high-value investment-oriented insurance policies where the investment return, not just the insurance cover, is the main purpose.
