Tax-Free Income Planning by Leveraging 10(10D) Provision

The Income Tax Act is designed to ensure fair taxation and revenue generation for governments. However, within its provisions ‘lies a unique opportunity’ for individuals and businesses in India, to strategically plan their income to minimize tax liabilities. If you are looking for Tax-Free Income Planning one such provision is Section 10, which offers a means to receive income without incurring income tax.

In this article, we will explore how this provision can be utilized for Tax-Free Income Planning.

Income Exempt from Tax as Per Section 10

Most income that is exempted from tax is listed under Section 10 of the Income Tax Act. This section contains a list of income that is deemed or considered to be free from taxation. Exempted income specified under Section 10 is as follows:

Tax-Free Income Planning for Everyone – Understanding 10(10D)

While there are a few sources of income listed that are exempted from income tax, for the mass population in India, Section 10(10D) of the Income Tax Act pertains to the tax treatment of proceeds from life insurance policies. This is your ticket to planning tax-free income.

Under Section 10 (10D) of the Income Tax Act, 1961, an individual can avail of tax exemption on the sum assured and accrued bonus (if any) received through their life insurance policy claim (maturity or death benefit). This exemption is also applicable for the returns earned from a ULIP and available on all forms of life insurance policy claims.

Originally it stated that any sum received, including the sum allocated by way of bonus, under a life insurance policy issued on or after April 1, 2003, shall be exempt from income tax.

However, in the Union Budget 2023, a monetary limit was proposed (now enforced) on other life insurance policies, and the following provisions have been inserted in Section 10(10D) in this respect:

• It is provided that no exemption shall be available in respect of life insurance policies (excluding ULIP) issued on or after 01-04-2023 if the premium payable for any year during the term of the policy exceeds 5 lakhs [Sixth proviso to Section 10(10D)].
• If the premium is payable by a person for more than one life insurance policy, the exemption shall be available only for those life insurance policies (other than ULIPs), where the aggregate amount of premium does not exceed 5 lakhs in any of the previous years during the term of any of those policies [Seventh proviso to Section 10(10D)].
• The above provisos shall not apply where the sum is received on the death of a person [Eighth proviso to Section 10(10D)]. In such case, the claim amount received by the beneficiaries would be tax-free.
• As per the amendments proposed in the Finance Bill 2021, exemption under section 10(10D) of the Income Tax Act, 1961 shall not apply to the ULIP plans issued on or after February 1, 2021, where the aggregate annual premium of all ULIP plans payable in the financial year exceeds INR 2,50,000/-

This exemption is subject to certain conditions, such as the premium paid not exceeding a certain percentage of the sum assured.

To qualify for this tax exemption or when planning a tax-free income, certain conditions must be met:

1. Date of Issuance: Policies issued before April 1, 2003 are not eligible for the benefits under Section 10(10D).

2. Premium Limit: The premium paid in any year during the policy tenure should not exceed a certain percentage of the sum assured. The exact percentage may vary based on the specific policy and the terms set by the insurance company.

3. Continuity of the Policy: The policy must be in force for a minimum period as specified by the income tax regulations. If the policy is terminated prematurely, the tax exemption benefits under Section 10(10D) may be forfeited.

It is important to note that the exemption under Section 10(10D) applies to the proceeds received from the life insurance policy, including the sum assured and any bonuses allocated. This provision does not cover the premiums paid towards the policy. The premiums paid are generally not eligible for any income tax deduction unless they meet the criteria specified under other sections of the Income Tax Act, such as Section 80C for specific life insurance policies.

Moreover, the tax exemption under 10(10D) applies to the sum received from a life insurance policy in any form, such as maturity proceeds, surrender value, or death benefits.

Overall, Section 10(10D) provides a favourable tax treatment for the proceeds from qualifying life insurance policies. By meeting the necessary conditions and understanding the specific requirements set by the Income Tax Act, individuals can avail themselves of the tax exemption benefits offered under this provision, thereby enabling tax-efficient income planning and ensuring financial security.

Strategic Planning for Tax-Free Income

1. Choosing the Right Life Insurance Policy:

To take advantage of the 10(10D) provision, it is crucial to select a life insurance policy that aligns with your financial goals. Ensure that the policy meets the requirements for tax exemption under this provision, such as the sum assured being at least 10 times the premium paid in any year.

2. Policy Maturity:

By structuring your life insurance policy to mature at a particular time, you can receive a lump sum payout upon maturity that is exempt from income tax under 10(10D). This can be particularly advantageous if you require a significant amount of funds at a specific point in the future, such as retirement or funding a child’s education.

3. Systematic / Partial Withdrawals:

Certain life insurance policies allow policyholders to make systematic monthly/annual partial withdrawals during the policy tenure. These withdrawals may not be subject to income tax under 10(10D) if they meet the necessary conditions. Utilizing this feature strategically can provide a tax-efficient source of income when needed.

4. Premium Allocation:

Policyholders can structure their premium allocation to ensure that the maximum portion goes towards the sum assured rather than investment-linked components of the policy. This approach can help maximize the tax exemption benefits under 10(10D).

5. Tax Planning with Riders:

Additional riders such as critical illness or disability coverage can be added to a life insurance policy. These riders may also offer tax benefits, further enhancing your tax-efficient income planning.

Seeking Professional Advice for Tax-Free Income Planning

Given the complexities and potential implications of tax planning, it is essential to consult with a qualified financial advisor at SimplePath. We can guide you in understanding the nuances of 10(10D) and help tailor your financial strategy to ensure compliance with tax regulations while maximizing the benefits available.

Conclusion on Tax-Free Income Planning with Section 10(10D)

The 10(10D) provision in the Income Tax Act provides individuals and businesses with a valuable opportunity to plan and receive income without incurring income tax liabilities. By understanding the requirements and conditions set forth in this provision, individuals can strategically structure their life insurance policies to maximize tax benefits. However, it is crucial to note that tax laws and provisions are subject to change, so staying updated with the latest regulations and seeking professional advice is essential. Utilizing the provision of 10(10D) can be an effective tool for tax-efficient income planning, contributing to long-term financial stability and growth.