INCOME TAX ON INSURANCE for FY 2025-26

Income Tax on Insurance FY 2025-26 covers how life insurance maturity proceeds, death benefits, ULIPs, and annuity payouts are taxed, including Section 10(10D) exemptions and TDS rules.

Insurance Income Taxation for FY 2025-26

The Article on ” TAX PLANNING FOR FY 2025-26  CONTAINS 11  PARTS

 PART I: MAJOR CHANGES IN TAX RULES FOR FY 2025-26 

 PART 2 : TAX SLABS /RATES FOR FY 2025-26

​ PART 3 : TAX REBATES FOR FY 25-26 

PART 4 :  CAPITAL GAIN TAX  FOR FY 2025-26

PART 5 : TAX ON  SALE OF RESIDENTIAL PROPERTY 

PART 6 :  TAX ON MUTUAL FUNDS

PART 7:   TAX ON INSURANCE

PART 8 : INCOME TAX CALCULATOR FOR FY 2025-26

PART 9 : TAX ON RETIREMENT BENEFITS FOR FY 2025-26

PART 10 : HOW TO PAY INCOME TAX ONLINE? 

PART 11 : ​TO KNOW ALL ABOUT TDS RATES , 

PART 7 – TAX  ON INSURANCE FOR FY 2025  -26 

nsurance income taxation for FY 2025-26 remains largely the same across both regimes regarding the “exemption” of maturity proceeds, but the deduction for premiums differs significantly.

Here is the breakdown of how insurance income is taxed

1. Death Benefits (Section 10(10D))

• Tax Treatment: 100% Tax-Free in both the Old and New Tax Regimes.
• The sum assured plus any bonuses received by the nominee upon the death of the policyholder are exempt from tax, regardless of the premium amount or the type of policy.

2. Maturity Proceeds (Section 10(10D))

Maturity proceeds are tax-free only if they meet specific conditions. If these conditions are not met, the “income” portion (Maturity Value minus total premiums paid) is taxed as “Income from Other Sources” at your Slab Rate.

A. The 10% Rule (Sum Assured Ratio)

For policies issued after April 1, 2012, the annual premium must not exceed 10% of the Sum Assured.

• Example: If your sum assured is ₹10 Lakh, your annual premium must be ₹1 Lakh or less for the maturity to be tax-free.

B. The ₹5 Lakh Cap (Traditional Policies)

For non-ULIP policies (Endowment, Money-back, etc.) issued on or after April 1, 2023:

• If the aggregate annual premium of all such policies exceeds ₹5 Lakh, the maturity proceeds of the “extra” policies will be taxable.
• Policies issued before this date are not affected by this cap.

C. The ₹2.5 Lakh Cap (ULIPs)

For Unit Linked Insurance Plans (ULIPs) issued on or after February 1, 2021:

• If the annual premium exceeds ₹2.5 Lakh, the maturity proceeds are taxable.
• Budget 2025 Update: Starting FY 2025-26, gains from these high-premium ULIPs are taxed as Capital Gains at 12.5% (LTCG) instead of the higher slab rates.

3. Comparison: New vs. Old Regime

Insurance income taxation for FY 2025-26 remains largely the same across both regimes regarding the “exemption” of maturity proceeds, but the deduction for premiums differs significantly.

Here is the breakdown of how insurance income is taxed:

1. Death Benefits (Section 10(10D))

• Tax Treatment: 100% Tax-Free in both the Old and New Tax Regimes.
• The sum assured plus any bonuses received by the nominee upon the death of the policyholder are exempt from tax, regardless of the premium amount or the type of policy.

2. Maturity Proceeds (Section 10(10D))

Maturity proceeds are tax-free only if they meet specific conditions. If these conditions are not met, the “income” portion (Maturity Value minus total premiums paid) is taxed as “Income from Other Sources” at your Slab Rate.

A. The 10% Rule (Sum Assured Ratio)

For policies issued after April 1, 2012, the annual premium must not exceed 10% of the Sum Assured.

• Example: If your sum assured is ₹10 Lakh, your annual premium must be ₹1 Lakh or less for the maturity to be tax-free.

B. The ₹5 Lakh Cap (Traditional Policies)

For non-ULIP policies (Endowment, Money-back, etc.) issued on or after April 1, 2023:

• If the aggregate annual premium of all such policies exceeds ₹5 Lakh, the maturity proceeds of the “extra” policies will be taxable.
• Policies issued before this date are not affected by this cap.

C. The ₹2.5 Lakh Cap (ULIPs)

For Unit Linked Insurance Plans (ULIPs) issued on or after February 1, 2021:

• If the annual premium exceeds ₹2.5 Lakh, the maturity proceeds are taxable.
• Budget 2025 Update: Starting FY 2025-26, gains from these high-premium ULIPs are taxed as Capital Gains at 12.5% (LTCG) instead of the higher slab rates.

3. Comparison: New vs. Old Regime

4. TDS (Tax Deducted at Source)
If your insurance maturity is taxable (i.e., it doesn’t meet the 10(10D) criteria):
TDS Rate: 2% (reduced from 5% previously)
Threshold: TDS is deducted if the total payout exceeds ₹1 Lakh.
Calculation: TDS is deducted only on the net income portion (Total Payout minus Total Premiums Paid)

5. Annuity and Pension Plans

Income received as a regular pension (Annuity) from plans like LIC Jeevan Akshay or NPS is fully taxable at your applicable slab rate in both regimes. There is no exemption for these payouts.

THIS ARTICLE CARRIES INFORMATION ON VARIOUS TAX PROVISIONS WHICH ARE GENERALLY USEFUL .YET IT DOES NOT CARRY ALL THE PROVISIONS AND HENCE YOU ARE ADVISED TO GO THROUGH INCOME TAX DEPARTMENT WEBSITES FOR AUTHENTIC COMPLETE INFORMATION ,ESPECIALLY FOR THOSE WHO HAVE GOT MULTIPLE STREAMS OF INCOME OR COMPLEX INVESTMENTS .YOU MAY ALSO CONSULT A QUALIFIED TAX CONSULTANT / CHARTERED ACCOUNTANT FOR ANY CLARIFICATION. READERS ARE ALSO WELCOME TO SEND FEEDBACK , FORM AVAILABLE BELOW. WE ARE OPEN FOR CORRECTION IF NEEDED

This article is for informational purposes only. It summarises updates from publicly available sources and AI-generated insights. We have extensively used information gathered from a reputed AI app in preparing this article We are not SEBI-registered investment advisors, and this content does not constitute investment advice