It depends on what kind of policy it is and when it was issued, and the two questions have to be asked in that order. A unit linked policy issued on or after 1 February 2021 loses the exemption where the premium payable for any year exceeds Rs 2,50,000, aggregated across all such ULIPs; any other life policy issued on or after 1 April 2023 loses it where the premium exceeds Rs 5,00,000, aggregated across all such policies. The premium-to-sum-assured percentage tests of 20, 10 or 15 per cent were never repealed and run alongside the money caps, so a policy issued today has to clear both. A sum received on death stays exempt through all of it. Once the exemption goes, a non-ULIP policy is taxed as income from other sources under s.56(2)(xiii) with Rule 11UACA. A ULIP is taxed as a capital gain under s.45(1B) with Rule 8AD — but until the Finance Act 2025 omission takes effect s.45(1B) reaches only a ULIP that fails clause (10D) on the fourth or fifth proviso, so a ULIP that fails only the ten per cent sum-assured test is outside s.45(1B) and is expressly excluded from s.56(2)(xiii), and sits in neither charge. The two heads carry different rates and are not interchangeable.
Clause (10D) of s.10 exempts "any sum received under a life insurance policy, including the sum allocated by way of bonus" on it. Everything difficult about the provision sits in the exclusions and the provisos that have been layered on to it since 2003. I have worked from the departmental text of s.10 at incometaxindia.gov.in/w/section-10-62 and from the department's own tutorial 'Taxation of Life Insurance Policies'; the section page's provisos to clause (10D) carry a footnote recording their substitution by the Finance Act 2023 with effect from 1 April 2024, so the text I worked from reflects that substitution. Note the standing warning about that site: it can confirm that text exists, never that text is absent — the /w/section-56-56 page I first tried served a version of s.56 with no clause (xiii) at all, and /w/section-45-32 served a version of s.45 with no sub-section (1B).
**The old percentage tests, and which policy dates they govern.** For a policy issued on or after 1 April 2003 but on or before 31 March 2012, the exemption is lost where the premium payable for any year during the term exceeds 20 per cent of the actual capital sum assured. For a policy issued on or after 1 April 2012, the figure drops to 10 per cent. Where the life assured is a person with disability or severe disability under s.80U, or suffering from a disease or ailment specified under s.80DDB, a proviso substitutes 15 per cent for 10 per cent for policies issued on or after 1 April 2013. These tests were never repealed. They sit on top of, not instead of, the newer money caps, so a ULIP issued in 2024 has to clear both the 10 per cent test and the Rs 2,50,000 cap.
**ULIPs: 1 February 2021 and Rs 2,50,000.** The fourth proviso to clause (10D) takes a unit linked insurance policy issued on or after 1 February 2021 out of the exemption where the amount of premium payable for any of the previous years during the term exceeds Rs 2,50,000. The fifth proviso does the aggregation: where premium is payable by a person for more than one such ULIP, the exemption is available only in respect of those policies whose aggregate premium does not exceed Rs 2,50,000 for any of the previous years. 'Unit linked insurance policy' is defined for this purpose by an Explanation to clause (10D) by reference to the IRDAI framework. The departmental page I fetched yielded the sub-clauses and the nine provisos but not the Explanations, so I cannot give the ordinal number of that Explanation from a page I fetched and do not state one. The Board issued guidelines on how the aggregation works in CBDT Circular No. 2 of 2022 dated 19 January 2022, which uses the same two-situation structure as the later Rs 5,00,000 circular. The circular number and that date are established; its file number is on no page I could fetch, so none is given.
**Other life policies: 1 April 2023 and Rs 5,00,000.** The Finance Act 2023 substituted the then sixth proviso with a new set. The sixth proviso denies the exemption to a sum received under a life insurance policy other than a ULIP issued on or after 1 April 2023 where the premium payable for any of the previous years during the term exceeds Rs 5,00,000; the seventh proviso does the same aggregation for more than one such policy. Both operate from assessment year 2024-25. The Board's guidelines on this are Circular No. 15 of 2023, F. No. 370142/28/2023-TPL, dated 16 August 2023, which is the page you actually work from: it defines an 'eligible life insurance policy', splits the enquiry by whether exemption has already been claimed on an earlier eligible policy, works thirteen numbered examples, states that premium is taken exclusive of GST, and holds that "the provision of the sixth and seventh proviso of clause (10D) of section 10 shall not be applicable in case of a term life insurance policy". The practical consequence of the circular is that where the aggregate is breached the exemption is not lost across the board — it survives for whichever combination of policies keeps the aggregate inside Rs 5,00,000, and the assessee chooses that combination. So the adviser's job is to steer the exemption on to the largest maturity.
**Death.** A further proviso disapplies the fourth, fifth, sixth and seventh provisos to any sum received on the death of a person, and a separate proviso does the same for the 20 and 10 per cent sub-clauses. A death claim is therefore exempt whatever the premium was and whatever the sum assured ratio was. This is the single carve-out that survives everything else in the clause, and it is worth saying to a client plainly, because the market commentary around the 2021 and 2023 changes did not always make it clear.
**Where a ULIP has lost the exemption: capital gains.** Section 45(1B) provides that "Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any amount under a unit linked insurance policy, to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof, including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head "Capital gains"", deemed to be income of the year of receipt and computed as prescribed. The prescribed manner is Rule 8AD of the Income-tax Rules, inserted by Notification No. 08/2022 dated 18 January 2022 — not Rule 8AB, which is the rule under s.48(iii) for partner retirement and has nothing to do with this. Rule 8AD gives A minus B for the first receipt, where A is the amount received for the first time under the specified ULIP and B is the aggregate premium paid during the term up to that date, and C minus D for later receipts, where D excludes premium already taken into account in an earlier year.
**The equity and non-equity split.** The Explanation to s.112A brings within 'equity oriented fund' a fund set up under a scheme of an insurance company comprising unit linked insurance policies to which the clause (10D) exemption does not apply on account of the fourth and fifth provisos — but only where the fund satisfies the investment condition, a minimum of 65 per cent of total proceeds in equity shares of domestic companies listed on a recognised stock exchange, or 90 per cent into another fund which itself holds 90 per cent in such equity shares, and the Explanation requires that "the minimum requirement of ninety per cent or sixty-five per cent, as the case may be, is required to be satisfied throughout the term of such insurance policy". So an equity-heavy ULIP that has lost the exemption is taxed as if the units were units of an equity oriented fund — s.112A on the long-term gain, s.111A on the short-term gain, and a corresponding STT charge was brought in by Notification No. 09/2022 of the same date. A debt-heavy ULIP that never meets the 65 per cent test throughout is not an equity oriented fund, so s.112A and s.111A do not reach it: the gain is an ordinary capital gain, long-term if the policy is held more than 24 months and taxed under s.112, otherwise at slab rates. That Explanation is itself moving. The Board's Key Highlights of the Finance Act 2025 records that clause (a) and the second proviso of the Explanation to s.112A "have been amended to make them applicable to all ULIPs where an exemption under Section 10(10D) is not available", with the consequence that "ULIPs that do not qualify for exemption under Section 10(10D) shall be included in the definition of an equity-oriented fund". The equity-oriented-fund limb therefore changes alongside s.2(14) and s.45(1B), and everything in this paragraph is the position under the Explanation as it stands before that change. Note also that the departmental s.112A page I fetched is stale on the rate — it still shows 10 per cent and Rs 1 lakh. After the Finance (No.2) Act 2024, for transfers on or after 23 July 2024 the s.112A rate is 12.5 per cent on gains exceeding Rs 1,25,000, the s.112 rate is 12.5 per cent, indexation is gone, and the long-term holding period is 12 months for listed securities and units of an equity oriented fund and 24 months for everything else.
**Where a non-ULIP policy has lost the exemption: other sources.** Section 56(2)(xiii) charges, under income from other sources, a sum received including bonus under a life insurance policy to which clause (10D) does not apply, to the extent it exceeds the aggregate premium paid during the term. The computation is in Rule 11UACA, notified by Notification No. 61/2023 dated 16 August 2023 — the same day as the circular. For the first receipt, income is the amount received as reduced by the aggregate premium paid up to the date of receipt; for a later receipt, the amount received in that year as reduced by premium paid, excluding premium already taken into account in an earlier year. Two limbs of the rule matter in practice: premium that "has been claimed as deduction under any other provision of the Act" is not allowed again, so the part of the premium already relieved under s.80C comes out of the subtraction; and premium already included in an earlier year's computation cannot be counted twice.
**Which route a policy takes.** This is the fork that decides the rate, and it is not a matter of choice. If the policy is a ULIP, s.45(1B) applies and the receipt is a capital gain — potentially at 12.5 per cent, with an exempt slice under s.112A if the fund is equity oriented. If it is any other life policy, s.56(2)(xiii) applies and the whole excess is other-sources income at the assessee's slab rate, with no concessional rate and no exempt slice. On the same money, the difference between the two heads can be more than half the tax. Getting the classification wrong in the return is not a presentational error. Note also the direction of travel, and convert the year before you act on it. The departmental s.45 page footnotes the relevant words in s.45(1B): "Words 'on account of the applicability of the fourth and fifth provisos thereof' shall be omtt. by Act No. 7 of 2025, w.e.f. 1-4-2026." A commencement on 1 April 2026 means assessment year 2026-27, which is amounts received during the previous year 2025-26 — that is, between 1 April 2025 and 31 March 2026, a full year before the commencement date reads on its face. The Finance Act 2025 makes matching changes to the definition of capital asset in s.2(14) and to the equity-oriented-fund limb of the Explanation to s.112A. From assessment year 2026-27, then, every ULIP that fails clause (10D) for any reason — including one that fails only the 10 per cent sum-assured test — goes down the capital gains route rather than being left in neither charge.
**Withholding.** Section 194DA requires any person paying a resident any sum under a life insurance policy, including bonus, other than an amount not includible in total income under clause (10D), to "deduct income-tax thereon at the rate of two per cent on the amount of income comprised therein". The 2 per cent rate replaced 5 per cent with effect from 1 October 2024. No deduction is made where the payment, or the aggregate of payments to the payee in the financial year, is less than Rs 1,00,000. Two things follow. First, a deduction under s.194DA is itself the insurer's signal that it has treated the payout as outside clause (10D), and it is worth asking the insurer why before accepting it. Second, 2 per cent of the income element will almost never equal the tax actually payable — on a non-ULIP policy taxed at slab it will be far short — so the credit in Form 26AS is not a measure of the liability.
**Section 80C.** The premium side has its own percentage caps, which happen to use the same numbers but do a different job. Section 80C(3) allows the deduction on a policy issued on or before 31 March 2012 only to the extent the premium is not in excess of 20 per cent of the actual capital sum assured; s.80C(3A) reduces that to 10 per cent for a policy issued on or after 1 April 2012, with 15 per cent for a policy on the life of a person with disability under s.80U or with a disease specified under s.80DDB issued on or after 1 April 2013. Two consequences worth stating to a client. A policy can fail the s.80C percentage cap on the way in and still be exempt on the way out, or the reverse; the two tests are independent even where the percentages coincide. And under the default regime in s.115BAC there is no s.80C deduction at all, so for most individuals the premium now buys no relief on the way in — see chapter-via-common-deductions-and-the-new-regime. Section 80CCC is a separate deduction for a contribution to an annuity plan and does not carry these percentage caps; a pension policy that pays out is taxed under s.80CCC(2), not under clause (10D).
**Under the Income-tax Act 2025.** The successor to clause (10D) is entry 2 of Schedule II to the Income-tax Act 2025, which carries the same structure: the percentage-of-sum-assured tests, the Rs 2,50,000 ULIP aggregate, the Rs 5,00,000 aggregate for other policies, the Keyman exclusion and the death carve-out. I have not been able to identify the 2025 Act numbers for the successors to s.45(1B), s.56(2)(xiii) or s.194DA from a page I fetched, and have not guessed them.
Life insurance is still sold on the strength of a tax-free maturity, and a large proportion of policies written since February 2021 or April 2023 are not tax free. The exposure is not marginal: on a ULIP the whole excess of receipt over premium is taxed, and on a traditional policy it is taxed at slab rates as other-sources income with no concessional rate and no exemption threshold. The aggregation rules mean a client can lose the exemption on a policy that is well inside the limit on its own, simply because of another policy he holds. And because the exemption is tested afresh in the year each sum is received, the adviser has a real choice to make about which policy to claim on — a choice the Board's circular expressly leaves with the assessee and which is worth exercising deliberately rather than by accident.
We sold the goodwill our own firm built up over the years. It cost us nothing to acquire. Is the price taxable as a capital gain?
I held shares as an investment for years and then started dealing in them. When I sell, is my profit measured from what I originally paid or from the market value on the day I began trading?
The landlord paid my company to give up its tenancy. Is that taxable, and if it cannot be computed as a capital gain can the officer tax it as a casual receipt instead?
We sold gold sovereigns and silver coins that the family used at puja. Were they personal effects, outside capital gains?
My client held shares of the amalgamating company as stock-in-trade and received shares of the amalgamated company under the court-sanctioned scheme. Is there business income at that point, or only when those shares are sold?
My client received agricultural land from a company in liquidation. Agricultural land is not a capital asset, so is there anything to tax under s.46(2)?
My land is still entered as agricultural in the revenue records and I have paid land revenue on it right up to the sale. The Assessing Officer says it stopped being agricultural land years ago. Can he do that?
I am buying the shares of a foreign holding company from another non-resident, and that company's subsidiaries hold shares in an Indian company — must I withhold tax under section 195?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.
