NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Other Products

Taxation of Insurance Products and Annuities for NISM Investment Adviser

Updated 11 October 2026 · Fact-checked

Life insurance tax has three parts: the deduction on premiums, the tax on maturity proceeds, and the tax on annuity income. Death proceeds are exempt. Maturity proceeds are exempt under Section 10(10D) unless a premium-to-sum-assured or premium-amount limit is breached. Annuity income is taxed at slab rates.

Understand Taxation of Insurance Products and Annuities

Start with the three moments of a policy's life. You pay premiums, you may receive money at maturity or surrender, and your nominee may receive money on death. Tax law looks at each moment separately. An adviser must answer three questions: can the premium be deducted, is the payout exempt, and if not, how is it taxed?

Premium deduction. Under the old tax regime, life insurance premiums qualify for deduction under Section 80C, within the overall limit of ₹1,50,000. The deduction is capped when the premium is high relative to the sum assured. The cap depends on the issue date:

Policies issued before 1 April 2003: no premium-to-sum-assured limit.
Policies issued from 1 April 2003 to 31 March 2012: the premium must not exceed 20% of the sum assured.
Policies issued on or after 1 April 2012: the limit is 10% of the sum assured.
Policies issued on or after 1 April 2013 on a person with severe disability (Section 80U) or a specified disease (Section 80DDB): the limit is 15%. For such persons, policies issued from 1 April 2012 to 31 March 2013 have the 10% limit, and policies issued from 1 April 2003 to 31 March 2012 have the 20% limit.

The new tax regime does not give this deduction.

Maturity and death proceeds. Section 10(10D) exempts the sum received under a life insurance policy, including bonus. Death proceeds are exempt. Maturity is also exempt, except in these cases:

Keyman insurance.
Policies where the premium breaches the premium-to-sum-assured limit (20% for policies issued from 1 April 2003 to 31 March 2012, 10% for policies issued on or after 1 April 2012, 15% for disability or specified disease policies issued on or after 1 April 2013).
Non-ULIP policies issued on or after 1 April 2023 where the aggregate premium exceeds ₹5,00,000 in any year. In this case, the gain is taxed as income from other sources.

The ₹5,00,000 aggregate-premium limit applies only to non-ULIP policies issued on or after 1 April 2023. Death proceeds remain exempt even when this limit is breached. Policies on a person with disability or specified disease issued on or after 1 April 2013 have their own higher premium-to-sum-assured limit of 15%, which is treated separately, so read the question facts.

ULIPs. A ULIP is both insurance and investment. For ULIPs issued on or after 1 February 2021, the maturity exemption is lost if the aggregate premium exceeds ₹2,50,000 in any year. The gain is then taxed as capital gains. An equity-oriented ULIP is treated like an equity mutual fund for this purpose. Death proceeds stay exempt. Switching between funds inside a ULIP is not a taxable transfer.

Annuities. When you pay into a pension plan and later buy an annuity, the annuity you receive is taxable at your slab rate in the year of receipt. It is taxed as salary or pension income, or as income from other sources, depending on the facts. Section 10(10D) does not exempt any pension or annuity payout from such plans. Annuity or pension received is taxable regardless of whether a deduction was claimed on the contribution. Section 80CCC applies only to contributions to an insurer's pension plan and only under the old regime. It falls within the overall ₹1,50,000 ceiling under Section 80CCE. Always match the deduction side with the receipt side.

Key formulas to remember

Section 80C premium cap (policies issued 1 April 2003 to 31 March 2012): Eligible premium ≤ 20% × Sum assured; Old regime only. Premium above the limit is not deductible. Policies issued before 1 April 2003 have no premium-to-sum-assured limit. Overall 80C ceiling is ₹1,50,000.
Section 80C premium cap (policies issued on or after 1 April 2012): Eligible premium ≤ 10% × Sum assured; The cap is 15% only for policies issued on or after 1 April 2013 on a person with severe disability or specified disease. For such persons, policies issued from 1 April 2012 to 31 March 2013 have the 10% cap. Old regime only.
Section 10(10D) premium test for policies issued on or after 1 April 2012: Exempt only if premium in every year ≤ 10% × Sum assured; If premium is higher in any year, the maturity sum is taxable. The limit is 15% for disability or specified disease policies issued on or after 1 April 2013.
High-premium non-ULIP policies issued on or after 1 April 2023: Aggregate annual premium > ₹5,00,000 → maturity gain taxable; Gain is taxed as income from other sources at slab rate. Death proceeds remain exempt.
ULIPs issued on or after 1 February 2021: Annual premium > ₹2,50,000 → maturity taxed as capital gains; Aggregate premium across ULIPs is counted. Death proceeds remain exempt.
Death proceeds: Death benefit = exempt under Section 10(10D); The premium and ₹5,00,000 or ₹2,50,000 limits do not remove the death benefit exemption. Keyman insurance is an exception.
Annuity income: Annuity received = taxable at slab rate; Taxed in the year received, whether or not a deduction was claimed. Not exempt under Section 10(10D).

How to solve Taxation of Insurance Products and Annuities questions

Use this order for any question on insurance or annuity tax. Fix the date of issue first, because rules differ by issue date.

1Identify the product: term, endowment, whole life, ULIP, or annuity or pension plan.
2Note the date of issue of the policy. Rules change at 1 April 2003, 1 April 2012, 1 February 2021 and 1 April 2023.
3Identify the payout: death, maturity, surrender, or annuity. Death is almost always exempt.
4For premium deduction, check the regime. The new regime gives no deduction. Under the old regime, check the 20% or 10% cap and the ₹1,50,000 ceiling.
5For maturity, test the exemption conditions: premium to sum assured ratio, ₹5,00,000 for non-ULIPs, ₹2,50,000 for ULIPs.
6If the exemption fails, decide the head of income. A non-ULIP gain is income from other sources. A ULIP gain is capital gains.
7Compute: payout minus premiums paid for the taxable gain. Apply the correct rate.
8State the final answer with the reason in one line.

Quickest way: Three-gate check

When to use it: Use for MCQs that ask whether a payout is taxable.

Gate 1: Is it a death claim? If yes, exempt. Stop.
Gate 2: Is it an annuity? If yes, taxable at slab rate. Stop.
Gate 3: Is it maturity? Check issue date, premium to sum assured ratio, and the annual premium limit (₹5,00,000 for non-ULIP, ₹2,50,000 for ULIP).
If any limit is breached, the exemption is lost. Pick the option that names the right head of income.

Common mistakes in Taxation of Insurance Products and Annuities

Treating all maturity proceeds as exempt.
Students remember the exemption headline under Section 10(10D) and skip the conditions.
Fix: Always test the premium to sum assured ratio and the annual premium limit before saying exempt.
Applying the ₹2,50,000 limit to a non-ULIP policy, or the ₹5,00,000 limit to a ULIP.
Both limits sound alike and both are recent changes.
Fix: Remember: ULIP is ₹2,50,000 and is taxed as capital gains. Traditional policies are ₹5,00,000 and are taxed as other sources.
Taxing death proceeds when the premium is high.
Students carry the maturity test over to death claims.
Fix: Death benefit stays exempt even if the maturity exemption is lost. Keyman insurance is the exception.
Using the 10% cap for a policy issued before 1 April 2012.
The current limit is better known than the older one.
Fix: Check the issue date first. Before 1 April 2012 the cap is 20%. After it, 10%.
Treating annuity income as exempt or as capital gains.
Students confuse a pension payout with a policy payout.
Fix: Annuity is regular income, taxed at your slab rate when received.
Giving an 80C deduction under the new tax regime.
Students forget the regime choice.
Fix: Check the regime in the question. If it is the new regime, there is no 80C deduction.

Worked examples

Example 1

Rohan bought an endowment policy on 1 June 2015. Sum assured is ₹5,00,000 and annual premium is ₹60,000. Under the old regime, what premium is eligible for deduction, and is the maturity amount exempt under Section 10(10D)?

Show the solution

The policy was issued after 1 April 2012, so the cap is 10% of the sum assured.
10% × ₹5,00,000 = ₹50,000.
The premium of ₹60,000 is more than ₹50,000, so only ₹50,000 is eligible for the 80C deduction, within the ₹1,50,000 overall ceiling.
Because the premium exceeds 10% of the sum assured, the Section 10(10D) maturity exemption is not available.
The maturity amount is therefore taxable. Death proceeds would still be exempt.

Answer: Eligible deduction is ₹50,000. The maturity amount is not exempt under Section 10(10D) because the premium exceeds 10% of the sum assured.

Example 2

Meera bought an equity-oriented ULIP on 1 March 2021 with an annual premium of ₹3,00,000. She paid for 5 years (total ₹15,00,000) and received ₹25,00,000 at maturity on 1 March 2026, after holding it for more than 12 months. Assume the gain is treated under Section 112A as for equity-oriented units, with the conditions for that section met, and that long-term capital gains are taxed at 12.5% on gains above ₹1,25,000. Ignore surcharge, cess and any other capital gains. What is her tax on the gain?

Show the solution

The ULIP was issued after 1 February 2021 and the annual premium of ₹3,00,000 exceeds ₹2,50,000.
So the maturity exemption under Section 10(10D) is lost. The gain is taxed as capital gains.
An equity-oriented ULIP is treated like an equity mutual fund, so the equity long-term capital gains rules under Section 112A apply, on the stated assumption that its conditions are met.
Gain = ₹25,00,000 − ₹15,00,000 = ₹10,00,000.
Holding period is more than 12 months, so it is long-term.
Taxable gain = ₹10,00,000 − ₹1,25,000 exemption limit = ₹8,75,000.
Tax = 12.5% × ₹8,75,000 = ₹1,09,375.

Answer: On the stated assumptions, her tax on the gain is ₹1,09,375, before surcharge and cess.

Exam tips

Read the issue date of the policy first. Many questions are built on a date trap.
Memorise the pairs: ₹2,50,000 with ULIP and capital gains, ₹5,00,000 with traditional policies and other sources.
If the question says death claim, the answer is nearly always exempt. Check for keyman insurance.
For annuity questions, the answer is usually taxable at slab rate when received.
Check the regime. An 80C answer fails if the question says the new regime.

Practice questions from Taxation of Other Products

Taxation of Insurance Products and Annuities: frequently asked questions

Are life insurance maturity proceeds taxable in India?

Usually no, under Section 10(10D). The exemption is lost if the premium crosses the limit for the sum assured, or if annual premium exceeds ₹5,00,000 for non-ULIPs issued on or after 1 April 2023. For ULIPs issued on or after 1 February 2021, the limit is ₹2,50,000 a year.

How is a ULIP taxed in India?

If annual premium is within ₹2,50,000, the maturity amount is exempt under Section 10(10D). If it is above, the gain is taxed as capital gains. Death proceeds are exempt, and switches between funds are not taxed.

Is tax on annuity income India applicable?

Yes. The annuity you receive from an insurer's pension plan is taxed at your slab rate in the year you get it. It is not exempt under Section 10(10D).

Is the death benefit of a life policy taxable?

No. Death proceeds are exempt under Section 10(10D), even when the maturity exemption is lost because of high premium. The main exception is keyman insurance.