Insurance in India carries three separate tax benefits: a deduction on the life insurance premium you pay, a deduction on health insurance premiums, and a tax exemption on the money you or your nominee receive. Each has its own limits, and several rules changed recently. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, GST on individual policies was removed in September 2025, and TDS on taxable payouts is now 2%. This guide explains each rule in simple language with worked examples, so you can check whether your own policies qualify.

Quick answers

•      Life insurance premium: deduction up to ₹1.5 lakh a year under Section 80C (now Section 123). Available only in the old tax regime.

•      Health insurance premium: deduction of ₹25,000 for self and family, plus ₹25,000 or ₹50,000 for parents, under Section 80D (now Section 126). Old regime only.

•      Death claim: always tax-free for the nominee, in both regimes.

•      Maturity amount: tax-free only if the policy meets the premium-to-cover ratio and premium ceilings in Section 10(10D). This applies in both regimes.

•      GST: 0% on individual life and health insurance premiums since 22 September 2025.

Why insurance tax rules matter: India data

According to the IRDAI Annual Report 2024-25, India’s overall insurance penetration was 3.7% of GDP, with life insurance at 2.7%. The global average is 7.3%. Per-person premium spending (density) was $97 in India against $943 worldwide. India is the 10th largest insurance market in the world by premium volume, but its coverage level is roughly half the global average.

In practical terms, many Indian households are under-insured. Tax rules reduce the cost of cover and decide how much of your payout you keep, so understanding them helps you buy the right policy and avoid a tax surprise at maturity.

What changed on 1 April 2026: the Income-tax Act, 2025

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. It applies to income earned from that date, so returns for FY 2025-26 still use the old section numbers. The deduction limits stayed the same. Only the numbering changed. Insurer websites and older articles still use the old numbers, so this guide shows both.

Confirm the exact clause numbers with your tax professional before quoting them in a return or Form 16 declaration.

Section 80C (now Section 123): deduction on life insurance premiums

Premiums paid on a life policy (term, endowment, money-back or ULIP) qualify for deduction if the policy is on your life, your spouse’s life or your children’s lives. Policies on parents, siblings or in-laws do not qualify. The total limit is ₹1.5 lakh a year, shared with PPF, ELSS, EPF, tuition fees and home-loan principal.

The 10% rule. For policies issued on or after 1 April 2012, the deduction on the annual premium is capped at 10% of the sum assured (15% where the insured person has a disability or a specified disease). Example: you pay ₹60,000 a year on a policy with ₹5 lakh cover. Ten percent of ₹5 lakh is ₹50,000, so only ₹50,000 is deductible. Term plans rarely hit this limit because their cover is many times the premium. Endowment and money-back plans with low cover often do.

The lock-in rule. If you surrender a traditional policy within 2 years, or a ULIP within 5 years, the deductions you claimed earlier are reversed and added to your income in the year of surrender.

Section 80D (now Section 126): deduction on health insurance

Section 80D covers health insurance premiums, critical illness riders and preventive health check-ups. A critical illness or surgical rider attached to a term plan is claimed here, not under 80C.

Preventive health check-ups are included within these limits, up to ₹5,000 a year. Premiums must be paid by a non-cash mode such as UPI, net banking or card. Cash is accepted only for preventive check-ups. Example: a 35-year-old paying health premiums for self and for parents aged 65 can claim up to ₹25,000 + ₹50,000 = ₹75,000.

Section 10(10D): when insurance payouts are tax-free

Sections 80C and 80D reduce tax when you pay premiums. Section 10(10D) decides whether the money you receive is taxed. It applies in both the old and new regimes.

Death benefit

The sum received by the nominee on the policyholder’s death is tax-free regardless of the premium size. The main exception is keyman insurance taken by an employer, which is excluded from the exemption.

Maturity and surrender proceeds

Maturity proceeds, including bonuses, are tax-free only when the policy meets the conditions below.

Example of the 10% test. You pay ₹1,00,000 a year on a policy with ₹8 lakh cover. The premium is 12.5% of the sum assured, so the policy fails the 10% test. The maturity amount becomes taxable, although the death benefit stays tax-free. To pass, the same premium needs at least ₹10 lakh of cover.

What happens if a policy fails the conditions

•      ULIPs: gains are taxed as capital gains. Under Budget 2025 rules effective from 1 April 2026, long-term gains are taxed at 12.5% on gains above ₹1.25 lakh a year, and short-term gains at 20%. Tata AIA’s explainer notes that a ULIP breaching the 10% cover test is also taxed this way.

•      Non-ULIP plans above ₹5 lakh premium: the gain (maturity amount minus premiums paid) is taxed under Income from Other Sources at your slab rate.

TDS on taxable insurance payouts (Section 194DA, now 393(1))

If a payout is not exempt under Section 10(10D) and exceeds ₹1 lakh in a financial year, the insurer deducts TDS on the income part, which is the payout minus the premiums paid. The rate is 2%, down from 5% since 1 October 2024. Many older articles still show 5%.

Example: a taxable maturity of ₹30 lakh against ₹20 lakh of premiums paid gives income of ₹10 lakh and TDS of ₹20,000. TDS is an advance payment. You still report the income in your return, and the TDS is adjusted against the final tax.

GST on insurance premiums is now zero for individuals

From 22 September 2025, individual term, ULIP, endowment and health policies are exempt from GST, which was 18% earlier. On a ₹20,000 premium, that removes ₹3,600 of GST. Group policies still attract 18%. The change affects the price of the policy, not your income tax deductions.

Old vs new tax regime: which suits insurance buyers

The new regime is the default. Under it, income up to ₹12 lakh is effectively tax-free, and up to ₹12.75 lakh for salaried taxpayers, because of the Section 87A rebate and the ₹75,000 standard deduction. Budget 2026 left the slabs unchanged. The trade-off is that 80C and 80D deductions are not available. To claim them, you must choose the old regime.

Here is how the two compare for a salaried person with a gross income of ₹15 lakh, using FY 2026-27 new and old regime slabs:

SJS Finserve calculation for illustration. Excludes surcharge, HRA and other exemptions. Your figures will differ.

At this income, the old regime costs about ₹1.05 lakh more even after full 80C and 80D claims. The old regime would win only if total deductions beyond the standard deduction reach roughly ₹5.4 lakh, for example with a large home-loan interest claim. For many salaried taxpayers, the tax saving from insurance premiums is therefore a small bonus. The reason to buy insurance is protection for your family, and the amount of cover should come from your needs, not from the deduction.

Other sections to know

•      Section 80CCC: contributions to annuity and pension plans from life insurers qualify for deduction, but they sit inside the overall ₹1.5 lakh limit.

•      Section 80DD: a fixed deduction of ₹75,000 (₹1,25,000 for severe disability) for insurance policies set up for the maintenance of a dependent with a disability.

A practical checklist before you buy or renew

1.      Check which tax regime you file under. If you use the new regime, the 80C and 80D deductions will not apply to you.

2.      Decide the life cover from your family’s needs first. A common rule of thumb is 10 to 15 times annual income, and a term plan is the lowest-cost way to buy it.

3.      For endowment, money-back and ULIP policies, confirm that the annual premium is within 10% of the sum assured and within the ₹2.5 lakh (ULIP) or ₹5 lakh (non-ULIP) ceiling, counting all your policies together.

4.      Pay health premiums through a non-cash mode and keep the receipts.

5.      Do not surrender a policy within 2 years (traditional) or 5 years (ULIP) without checking the deduction reversal.

6.      Keep nominee details updated, since the death benefit goes to the nominee.

How SJS Finserve can help

Most families hold insurance policies bought from different agents at different times, with no single view of cover, premiums and tax treatment. At SJS Finserve, we start with a review of your existing life and health cover, check whether each policy meets the conditions above, and then build an investment plan around your goals. Our approach is Protect, Grow and Multiply: adequate insurance first, then disciplined SIPs, then more advanced options where suitable.

Once your protection is in place, these resources can help with the next step: our wealth advisory service, the SIP and financial calculators, our guide to goal-based investing for child education and marriage, and tax harvesting in mutual funds. If your income is rising, see how a 10% yearly step-up SIP builds a larger corpus.

If you would like a review of your policies and a plan for your investments, contact SJS Finserve for a free consultation.

Frequently asked questions

Is the maturity amount of a life insurance policy taxable in India?

It is tax-free under Section 10(10D) if the annual premium is within 10% of the sum assured (20% for policies issued between April 2003 and March 2012) and, for newer policies, within the ₹2.5 lakh ULIP or ₹5 lakh non-ULIP premium ceiling. Otherwise the gain is taxable.

Is a life insurance death claim taxable?

No. The death benefit received by the nominee is tax-free under Section 10(10D), whatever the premium size. Keyman policies are the exception.

Can I claim 80C and 80D under the new tax regime?

No. Both deductions are available only in the old regime. The Section 10(10D) exemption on payouts applies in both regimes.

What is the new section number for 80C?

Section 80C is Section 123 of the Income-tax Act, 2025, with the list of eligible investments in Schedule XV. It applies to income earned from 1 April 2026. Section 80D is now Section 126.

How much can I claim for health insurance for my parents?

Up to ₹25,000 if they are below 60 and up to ₹50,000 if they are senior citizens, in addition to the ₹25,000 for yourself and family. The maximum combined deduction is ₹1 lakh when both you and your parents are 60 or above.

Is a ULIP tax-free?

A ULIP issued on or after 1 February 2021 is tax-free at maturity only if total annual ULIP premiums are within ₹2.5 lakh and the 10% cover test is met. If not, gains are taxed as capital gains at 12.5% (long-term, above ₹1.25 lakh) or 20% (short-term). The death benefit stays tax-free.

Is GST charged on life insurance premiums now?

Not on individual policies. Individual term, ULIP, endowment and health policies have been exempt from GST since 22 September 2025. Group policies still carry 18%.

Is TDS deducted on insurance maturity?

Yes, when the payout is taxable and exceeds ₹1 lakh in a year. The insurer deducts 2% on the income part (payout minus premiums paid).