Got an LIC or ULIP payout – or a 194DA entry in your AIS – and no idea whether it is taxable? Most people believe every life-insurance maturity is tax-free. It is not: policies can fail the 10/15/20 percent premium-to-sum-assured tests, ULIPs bought after February 2021 lose exemption above Rs 2.5 lakh of annual premium, and non-ULIP policies bought after April 2023 lose it above Rs 5 lakh – tested on the AGGREGATE of your policies, with the law letting you choose which ones to keep exempt. This checker runs every test (updated for Finance Act 2025 and the current 2 percent TDS rate – many popular guides still show 1 or 5 percent), optimises the exempt combination across up to 12 policies, and computes the exact tax, the TDS already cut, and the balance you owe.
Step 1 – Is this policy’s payout taxable? (Section 10(10D) check)
Step 2 – Several policies? Optimise the Rs 2.5 lakh / Rs 5 lakh aggregation
The caps are tested on the AGGREGATE premium of ULIPs issued on or after 1-2-2021 (Rs 2.5 lakh) and non-ULIP policies issued on or after 1-4-2023 (Rs 5 lakh) – two separate pools. CBDT Circulars 02/2022 and 15/2023 let YOU choose which policies to keep exempt within each cap; this tool picks the combination that protects the largest payout. Older policies and term plans never consume the caps.
| Type | Issue date | Annual premium ex-GST (Rs) | Expected payout (Rs) | Claimed exempt earlier? |
|---|
Step 3 – Compute the tax, the 194DA TDS and the balance payable
Is LIC maturity amount taxable? The three rules that decide
| Premium-to-sum-assured test | ULIP Rs 2.5 lakh rule | Non-ULIP Rs 5 lakh rule | |
|---|---|---|---|
| Applies to | Every policy issued on or after 1-4-2003 | ULIPs issued on or after 1-2-2021 | Non-ULIP policies issued on or after 1-4-2023 |
| The test | Any year’s premium above 20 percent (2003-2012 issues), 10 percent (2012 onwards) or 15 percent (2013 onwards, insured with 80U disability / 80DDB disease) of the actual capital sum assured | AGGREGATE annual premium of such ULIPs above Rs 2,50,000 in any year | AGGREGATE annual premium (ex-GST) of such policies above Rs 5,00,000 in any year |
| If breached | Net receipt taxed as other sources at slab (practice; ULIP receipts from FY 2026-27: capital gains) | Capital gains u/s 45(1B): receipt minus premiums, usually 12.5 percent u/s 112A above Rs 1.25 lakh | Other sources u/s 56(2)(xiii): receipt minus premiums, at slab |
| Death claim | Always exempt for the nominee – all three rules are switched off on death (except keyman policies) | ||
Worked example – the “TDS is not my final tax” trap
AIS shows: Rs 80,00,000 against section 194DA – but only receipt minus premiums is income.
You declare: Rs 20,00,000 as income from other sources u/s 56(2)(xiii).
Tax on it: about Rs 5,46,000 (slab rate on top of other income, with cess).
TDS already cut: 2 percent of Rs 20,00,000 = Rs 40,000 only.
Balance payable: about Rs 5,06,000. The insurer’s TDS covers less than a tenth of the real tax – taxpayers who stop at the TDS get e-campaign notices, because the department already holds the 194DA entry.
Life insurance maturity tax – FAQs
Is every LIC maturity amount tax-free?
No – this is the single most expensive myth in personal tax. Exemption under section 10(10D) fails when the premium exceeds 10 percent of the sum assured (20 percent for 2003-2012 policies, 15 percent for post-2013 policies on disabled lives), when a post-Feb-2021 ULIP crosses Rs 2.5 lakh of annual premium, or when a post-Apr-2023 non-ULIP policy crosses Rs 5 lakh. Single-premium policies fail the ratio test almost by construction.
Which policies are always fully exempt?
Death claims (whatever the premium, except keyman policies), policies issued before 1 April 2003, and pure term insurance. Everything else must pass its ratio test and, if bought recently, the premium caps.
How does the Rs 2.5 lakh ULIP rule work with several ULIPs?
All ULIPs issued on or after 1 February 2021 are pooled: exemption survives only for a set whose combined annual premium stays within Rs 2,50,000 in every year of their terms. CBDT Circular 02/2022 confirms you may CHOOSE the most beneficial set – and once a ULIP has been claimed exempt, its premium permanently consumes the cap. ULIPs bought before February 2021 are exempt and never counted.
How does the Rs 5 lakh rule work for normal (non-ULIP) policies?
Same aggregation logic for non-ULIP policies issued on or after 1 April 2023, with a Rs 5,00,000 cap tested on premiums EXCLUDING GST (Circular 15/2023). Term insurance is expressly outside the rule – term premiums do not even count toward the cap. Policies bought before April 2023 neither lose exemption nor consume the cap.
I hold old and new policies together – do the old ones eat into the cap?
No. Pre-Feb-2021 ULIPs and pre-Apr-2023 traditional policies are ignored completely for the caps – both for their own exemption and for aggregation. Only the new-era policies compete for the Rs 2.5 lakh / Rs 5 lakh headroom.
How much tax do I pay when the maturity is taxable?
Never on the gross payout. A taxable ULIP is a capital gain u/s 45(1B): receipt minus total premiums (Rule 8AD), normally 12.5 percent u/s 112A above the Rs 1.25 lakh long-term threshold. A taxable non-ULIP payout is other-sources income u/s 56(2)(xiii): receipt minus premiums (Rule 11UACA) at your slab rate. Legacy policies that simply fail the ratio test are taxed on the net receipt as other sources in practice (ITAT, Sandeep Modi).
What changed for ULIPs in Budget 2025?
Finance Act 2025 closed a gap from FY 2026-27: ANY ULIP that loses the 10(10D) exemption – for any reason, including the 10 percent sum-assured test and not just the Rs 2.5 lakh cap – is now a capital asset taxed under section 45(1B). It also removed the premium caps for policies issued by IFSC-based insurers.
TDS was deducted under 194DA – is my tax done?
Almost never. The insurer deducts just 2 percent of the income component (rate reduced from 5 percent on 1 October 2024 – many websites still show 1 or 5 percent). Your actual tax is the slab or capital-gains rate on that component: a 30-percent-slab taxpayer owes roughly fifteen times the TDS. Compute the balance in Step 3 and pay it with your return.
AIS/26AS shows the FULL payout – what do I actually declare?
The AIS reports the gross amount paid against the 194DA entry, but you declare only the income component: receipt minus aggregate premiums, under capital gains (taxable ULIP) or other sources (everything else). Ignoring the entry invites an e-campaign notice; declaring the gross overpays badly. If you missed it in an earlier year, an updated return (ITR-U) can regularise it – see our ITR-U calculator.
Why is a single-premium policy almost always taxable?
Single-premium plans typically carry a sum assured of only 1.25 times the premium – so the premium is 80 percent of the sum assured, miles above the 10 percent limit. The maturity is taxable and 194DA TDS applies. This is exactly the fact pattern of the Sandeep Modi ITAT ruling, which confirmed only the NET receipt is taxed.
What happens if I surrender a policy early?
Two hits. First, the surrender value faces the same 10(10D) tests as maturity. Second, section 80C(5) claws back past deductions: terminate a traditional policy before paying 2 years’ premiums – or a ULIP before 5 years – and every 80C deduction you took for it becomes income of the year of termination.
Are pension or annuity plan payouts covered by 10(10D)?
No. Pension plans sit outside 10(10D) entirely: surrender proceeds and the pension are fully taxable u/s 80CCC(2) at slab. Only the commutation from an approved insurer’s fund is exempt u/s 10(10A)(iii).
I am an NRI receiving an LIC maturity – is TDS different?
Yes. For non-residents the insurer deducts under section 195, not 194DA – still on the income component, but with no Rs 1 lakh threshold and at rates that depend on the head and any DTAA relief. A lower-deduction certificate u/s 197 or treaty claim (with TRC and Form 10F) can reduce it – see our NRI income tax calculator for the wider picture.
Does anything change under the new Income-tax Act 2025?
Only the numbering, from tax year 2026-27: 10(10D) becomes section 11 read with Schedule II (Sl. 2), ULIP capital gains 45(1B) becomes 67(5), the other-sources charge 56(2)(xiii) becomes 92(2)(l), and 194DA TDS becomes section 393(1) Table Sl. 8 – same 2 percent rate and Rs 1 lakh threshold. All the tests this checker runs are carried over unchanged, and Finance Act 2026 touched none of them.
Method notes: rules per the Income-tax Act 1961 as amended through Finance Act 2025 (Finance Act 2026 made no change here) – section 10(10D) with its provisos, CBDT Circulars 02/2022 and 15/2023, Rules 8AD and 11UACA, and section 194DA at the current 2 percent (from 1-Oct-2024). The aggregation test uses your entered annual premium as constant across the term (“premium payable for any of the previous years”); premiums are ex-GST. For legacy policies failing only the ratio test the statute does not fix the head – this tool follows the prevailing net-receipt other-sources practice (Sandeep Modi, ITAT Kolkata) and applies capital-gains treatment to ULIP receipts from FY 2026-27 per Finance Act 2025. Reviewed by a practising CA; updated July 2026. Planning guidance, not a substitute for advice on an actual payout.