When Indian Life Insurance Maturity Is Tax-Free for an NRI, and When the Rs 2.5 Lakh and Rs 5 Lakh Premium Lines Make It Fully Taxable

A relationship manager in Mumbai sold you a "tax-free" endowment plan in 2014, Rs 6,00,000 of premium a year, and told you the maturity would come to you clean under Section 10(10D). You moved to London in 2018, kept paying, and the policy matures next year. You are now budgeting around a tax-free lump sum, and you are wrong on two fronts at once. The policy may well be taxable in India because the premium is above the line, and even if it were exempt in India, the United Kingdom would tax the gain anyway. The phrase "tax-free under 10(10D)" was true for a particular kind of policy in a particular era, and the era it applied to has been narrowing for a decade.

Section 10(10D) still exists, and it still makes most ordinary life insurance maturity proceeds genuinely tax-free. But Parliament has drawn two hard premium lines through it, one in February 2021 for ULIPs and one in April 2023 for traditional plans, specifically to pull high-value policies out of the exemption. For an NRI those lines bite harder than for a resident, because the policies sold to NRIs tend to be large, and because the home-country tax that sits on top does not care about the Indian exemption at all. This guide is about exactly where those lines fall, what crossing them does in rupees, and what your country of residence does to the payout regardless.

The 30-second answer: Indian life insurance maturity is tax-free under Section 10(10D) only within the premium limits. For any policy issued on or after April 1, 2012, no year's premium may exceed 10% of the sum assured. On top of that, a ULIP issued on or after February 1, 2021 loses the exemption if aggregate annual ULIP premium exceeds Rs 2,50,000, and a traditional non-ULIP policy issued on or after April 1, 2023 loses it if aggregate annual premium exceeds Rs 5,00,000. A non-exempt ULIP is taxed as capital gains (equity-oriented ULIPs at 12.5% long-term above Rs 1.25 lakh); a non-exempt traditional plan is taxed as Income from Other Sources under Section 56(2)(xiii) on proceeds minus premiums. TDS applies under Section 194DA (2% for residents) or Section 195 for NRIs. The death benefit stays exempt. The US and UK do not honour 10(10D).

If you want the account-level mechanics of paying premiums from an NRE or NRO account first, read the paying India insurance from NRE or NRO guide; this one assumes you already hold or are about to buy a policy and want to know how the payout is taxed. What follows is the structure of Section 10(10D) and its conditions, the two premium caps that flip a payout from exempt to taxable, how a taxable ULIP and a taxable traditional plan are taxed under different heads, the TDS your insurer deducts and how an NRI reclaims the excess, a worked example on a high-premium policy whose maturity is taxable, the edge cases (death benefit, keyman, surrender, the NRI TDS rate), and the home-country overlay that catches NRIs out most often.

What Section 10(10D) actually exempts, and the conditions attached

Section 10(10D) of the Income Tax Act exempts "any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy". That is the headline most people remember, and on its own it sounds absolute. It is not. The exemption has always carried conditions, and Parliament has added more over time, so the date your policy was issued decides which conditions apply to it.

Work through the eras, because grandfathering is real and it matters:

• Policies issued on or after April 1, 2003 and before April 1, 2012. The premium in any year must not exceed 20% of the actual sum assured. Stay under that and the maturity is exempt.
• Policies issued on or after April 1, 2012. The threshold tightens: the premium in any year must not exceed 10% of the actual sum assured. This is the condition most NRIs are vaguely aware of, and it is still live for every policy issued since.
• Policies covering a person with a disability or a specified disease, issued on or after April 1, 2013, get a more generous 15% of sum assured ceiling under the proviso, recognising that cover for such lives is priced higher.

The 10% rule is the foundation, and it is worth being precise about it because the wording matters. The test is the premium for any of the years during the term against the actual capital sum assured, taken as the minimum sum assured in any year of the policy and ignoring the value of any premiums to be returned and any guaranteed benefit additions. If a single year's premium breaches 10% (or 20%, or 15% as applicable), the whole maturity proceeds lose the exemption, not just the excess. This is the original gatekeeper, and on its own it already disqualified many investment-heavy plans where the premium ran high relative to a thin death cover.

What 10(10D) has always exempted without condition is the death benefit. The sum received by a nominee on the death of the insured is exempt regardless of the premium-to-sum-assured ratio, regardless of policy type, and regardless of the premium caps discussed below. Hold that distinction firmly, because almost every complication in this guide is about the maturity and surrender side, the investment payout, never the insurance payout on death.

The two premium lines that make a payout taxable

For a decade the 10% rule was the only real gate, and a well-structured policy with adequate cover sailed through it. Then the government decided that the exemption was being used as a tax shelter for large investments dressed up as insurance, and drew two hard rupee lines to stop it. These are the lines an NRI is most likely to cross, because the policies pitched to NRIs are precisely the high-premium ones.

Line one: ULIPs above Rs 2,50,000, from February 1, 2021

The Finance Act 2021 amended Section 10(10D) so that for any Unit Linked Insurance Plan (ULIP) issued on or after February 1, 2021, the maturity exemption survives only if the aggregate annual premium across all your ULIPs stays at or below Rs 2,50,000 in every year of the term. The 10% of sum assured condition still applies on top. Cross the Rs 2.5 lakh aggregate and the maturity of the offending policy is no longer exempt.

Two traps live in that sentence. The Rs 2.5 lakh is an aggregate, not a per-policy limit, so you cannot run two ULIPs of Rs 2 lakh each and keep both exempt; the premiums are added together and where a policy tips the aggregate over the line, that policy loses exemption. And ULIPs issued before February 1, 2021 are grandfathered, keeping full exemption regardless of premium subject only to the older 10% rule. If you hold a legacy high-premium ULIP, the new ceiling does not touch it.

Line two: traditional policies above Rs 5,00,000, from April 1, 2023

The Finance Act 2023 did the same thing to everything that is not a ULIP. For any non-ULIP life insurance policy issued on or after April 1, 2023 (endowment plans, money-back plans, whole-life savings plans, the classic guaranteed-return plans), the maturity exemption survives only if the aggregate annual premium across all such policies stays at or below Rs 5,00,000 in every year of the term. Again the 10% of sum assured condition applies on top, and again the limit is an aggregate across policies, not per policy. Policies issued before April 1, 2023 keep the old treatment.

So there are now two parallel regimes. ULIPs: the line is Rs 2,50,000 and it has applied since February 1, 2021. Traditional non-ULIP plans: the line is Rs 5,00,000 and it has applied since April 1, 2023. A policy that breaches the 10% rule fails regardless of these caps; a policy that clears the 10% rule still has to clear the relevant rupee cap if it was issued after the cut-off date. Death benefit remains exempt across all of it.

How a taxable payout is taxed: two different heads

Here is the part most NRIs miss entirely. When a policy fails the exemption, it is not all taxed the same way. The tax head, and therefore the rate, depends on whether the policy is a ULIP or a traditional plan. This is not a cosmetic distinction; it changes the rate dramatically.

A non-exempt ULIP is taxed as capital gains

The Finance Act 2025 settled years of argument by amending Section 2(14) so that a ULIP not eligible for the 10(10D) exemption is a capital asset, and Section 45(1B) so the gain on it is charged under the head capital gains. Effective from April 1, 2026 (assessment year 2026-27), a non-exempt equity-oriented ULIP is treated as an equity-oriented fund. Its long-term gain (units held more than 12 months) is taxed at 12.5% on the gain above Rs 1,25,000 in the financial year, with no indexation, and its short-term gain is taxed at 20%, mirroring the Section 112A and 111A treatment of equity mutual funds and listed shares since July 23, 2024. The taxable gain is the maturity or surrender proceeds minus the premiums paid.

The implication is brutal for the sales pitch. Below Rs 2.5 lakh, a ULIP's equity-fund-like maturity is genuinely tax-free. Above it, you have bought an equity mutual fund with an insurance rider stapled on, taxed exactly like an equity mutual fund at 12.5%, while paying a charge stack a mutual fund never charges. The wrapper that was sold for its tax shelter no longer shelters anything. The deeper critique of the ULIP economics, the four-charge stack and the unbundled alternative, is covered in the ULIPs for NRIs guide.

A non-exempt traditional plan is taxed as Income from Other Sources

A traditional non-ULIP policy that fails the exemption falls under Section 56(2)(xiii), inserted by the Finance Act 2023, which taxes the proceeds under the head Income from Other Sources. There is no 12.5% capital-gains rate here. The taxable amount is added to your total income and taxed at your slab rate, up to the highest slab of 30% plus surcharge and cess.

The computation is governed by CBDT Rule 11UACA, notified on August 16, 2023. In the year you first receive a sum, the taxable income is the sum received (including bonus) minus the aggregate premiums paid during the term that have not already been claimed as a deduction under any other provision (for example Section 80C). In a subsequent year where you receive a further sum, the taxable amount is that sum minus the premiums not already netted off earlier. The key point for an NRI: you are taxed on the gain, not the gross proceeds, but at slab rates rather than the gentler capital-gains rate that a ULIP gets. Two policies of identical economics, one ULIP and one endowment, can therefore face materially different tax bills on the same gain.

TDS: Section 194DA for residents, Section 195 for NRIs

A taxable maturity does not arrive in full and leave the tax to you. The insurer withholds before paying, and the section it withholds under depends on your residential status. This is the single biggest cash-flow surprise for NRIs, because the rate is higher and the reclaim is slower than for a resident.

For a resident, the insurer deducts TDS under Section 194DA. Where the maturity is not exempt under 10(10D) and the aggregate proceeds in the year exceed Rs 1,00,000, TDS is deducted on the income portion (proceeds minus premiums paid), at 2% with effect from October 1, 2024 (the rate was 5% before that date, reduced by the Finance Act 2024). No PAN pushes it to 20%.

For an NRI, Section 194DA does not apply. Any sum paid to a non-resident is covered by Section 195, the catch-all withholding section for payments to non-residents. The insurer must deduct at the rate in force for the income in question. For a non-exempt traditional policy taxed as Income from Other Sources, that means deduction at the applicable slab-equivalent rate, in practice the maximum marginal rate, plus surcharge and cess, unless you have obtained a lower-deduction certificate. For a non-exempt ULIP taxed as capital gains, deduction follows the capital-gains rate, 12.5% on the long-term gain plus surcharge and cess. The practical effect is that an NRI typically suffers a heavier upfront deduction than the 2% a resident would face, and then has to recover the excess.

The recovery route is the same one used across NRI taxation: file an Indian income tax return for the year, declare the correct taxable amount and the actual tax liability, and claim a refund of the TDS that exceeds it. If you are eligible for a lower or nil rate, you can apply in advance for a certificate under Section 197 using Form 13 so the insurer deducts less at source rather than your money sitting with the department until you file. The general machinery of NRI TDS and how refunds work is set out in the TDS for NRIs and refunds guide, and the lower-deduction route in the lower TDS certificate via Form 13 guide.

Worked example: a Rs 6 lakh traditional policy that matures taxable

Take a concrete case, because the abstract rule does not land until you see the rupees.

Anita is an NRI in the UK. In May 2023 she bought a traditional guaranteed-return endowment plan from an Indian insurer, sold to her as "tax-free under 10(10D)". The numbers:

• Annual premium: Rs 6,00,000, paid for 10 years.
• Sum assured: Rs 60,00,000 (so premium is 10% of sum assured, just within the 10% rule).
• Maturity value after 10 years: Rs 82,00,000 (premiums plus guaranteed additions and bonus).

Run the exemption test. The policy was issued after April 1, 2023, so the Rs 5,00,000 traditional-policy cap applies. Her annual premium of Rs 6,00,000 exceeds Rs 5,00,000. The policy therefore fails Section 10(10D), even though it cleared the 10% of sum assured condition. The "tax-free" pitch was wrong from the day she signed.

Now the tax. Because this is a traditional non-ULIP policy, the proceeds are taxed under Section 56(2)(xiii) as Income from Other Sources, computed under Rule 11UACA:

• Sum received on maturity: Rs 82,00,000
• Less aggregate premiums paid (Rs 6,00,000 multiplied by 10): Rs 60,00,000
• Taxable income from other sources: Rs 22,00,000

That Rs 22,00,000 is added to Anita's Indian total income and taxed at slab rates. Assuming this is her significant Indian income in that year and she is into the 30% slab, the base tax on the gain is roughly Rs 6,60,000, before surcharge and cess. Add the 4% health and education cess and any surcharge that applies at her income level, and the effective liability climbs above Rs 6,86,000.

On the withholding side, because Anita is an NRI, the insurer deducts under Section 195, not 194DA. It withholds on the income portion of Rs 22,00,000 at the applicable rate plus surcharge and cess, so a substantial sum is held back before the maturity reaches her UK account. She recovers any over-deduction by filing an Indian ITR for that year and reconciling the actual liability against the TDS, or she applies in advance for a Form 13 certificate to reduce the deduction at source.

The lesson sits in the gap between the pitch and the payout. Anita expected Rs 82,00,000 tax-free. The reality is a Rs 22,00,000 taxable gain at slab rates, a TDS deduction under Section 195 that lands well above the 2% a resident would have faced, and a refund cycle to recover the excess. Had she instead bought a ULIP with the same economics, the same Rs 22,00,000 gain would have been taxed as equity capital gains at 12.5%, roughly Rs 2,75,000 before surcharge and cess, less than half the bill. The head of taxation, set by the policy type, more than doubled her tax on the identical gain.

Edge cases

The general rule is clean. The exceptions are where NRIs get caught, so go through them deliberately.

The death benefit is always exempt. No premium cap touches it. The sum a nominee receives on the death of the insured is exempt under 10(10D) regardless of policy type, premium size, the Rs 2.5 lakh ULIP line, or the Rs 5 lakh traditional line. If your family's protection is the point, the death benefit is intact. Everything in this guide about taxability is about the living payout, maturity and surrender, not the death claim.

Keyman insurance is never exempt. A keyman policy, taken by an employer on the life of a key employee, is expressly excluded from Section 10(10D). The proceeds, whether on maturity or assignment to the employee, are taxable as business income or salary or income from other sources depending on who receives them. If you are an NRI founder or senior employee whose company holds a keyman policy on you, do not assume the personal exemption applies; it does not, and the same exclusion applies to amounts received under Section 80DD(3) or 80DDA(3).

Surrender is taxed on the same logic as maturity. Surrendering a policy early does not escape the rules. If the policy was exempt, a surrender after the policy has run its qualifying conditions can still be exempt, but a surrender of a policy that has failed the premium test is taxable exactly as a maturity would be: as capital gains for a non-exempt ULIP, as income from other sources for a non-exempt traditional plan, with TDS on the income portion. For traditional plans there is also the older anti-abuse rule under Section 80C that claws back premium deductions already claimed if you surrender within the minimum holding period. Surrender is not a clean exit; price the tax before you pull out.

The NRI TDS rate is the trap within the trap. The single most common surprise is the size of the Section 195 deduction. A resident with a taxable traditional payout sees 2% withheld. An NRI sees withholding at the full applicable rate, because Section 195 is designed to capture the tax before money leaves the country. The cash that reaches your foreign account is therefore smaller than a resident in your shoes would receive, even though your eventual liability is identical. The fix is procedural, not substantive: a Form 13 lower-deduction certificate obtained before the payout, or a refund claimed by filing an Indian ITR after it.

A DTAA can reduce the Section 195 rate, but read it carefully. Where a Double Taxation Avoidance Agreement assigns taxing rights or sets a lower rate on the relevant head of income, an NRI can claim the treaty rate on the TDS by furnishing a Tax Residency Certificate and Form 10F. Whether the treaty helps depends on how the payout is characterised (capital gains versus other income) and the specific article in your country's treaty with India. The mechanics of claiming treaty relief are covered in the DTAA mechanics, TRC and Form 10F guide.

The home-country overlay: 10(10D) stops at the border

This is the part that catches NRIs hardest, because it is invisible from the Indian side. Even a policy that is perfectly exempt in India under 10(10D) can be fully taxable in your country of residence, because Section 10(10D) is a provision of Indian law and no foreign tax authority adopts it. You are taxed by the country you live in on your worldwide income, and that country makes its own judgment about your Indian policy.

The United States is the worst case. A US person is taxed on worldwide income, and the US looks straight through the insurance wrapper. The funds inside an Indian ULIP are Passive Foreign Investment Companies (PFICs), reportable on Form 8621 under the punitive Section 1291 regime, and the policy itself can be treated as a foreign trust triggering Forms 3520 and 3520-A with their severe penalties. The inside cash-value buildup that compounds tax-free in India is not necessarily deferred in the US, and the contract may fail the US definition of life insurance under Section 7702. A 1% federal excise tax under Section 4371 hits premiums paid to a foreign insurer. The full picture, including what to do before you pay the next premium, is in the Indian ULIP and insurance US tax trap guide. For US persons, an Indian investment-style policy is rarely worth holding.

The United Kingdom taxes the chargeable-event gain. A UK resident holding a foreign life insurance policy is taxed on the gain on a chargeable event (maturity, surrender, or certain partial withdrawals) as income, under the chargeable-event-gain rules for offshore policies. There is no UK equivalent of the 10(10D) exemption, and because the policy is with a non-UK insurer, the "top-slicing" relief and the basic-rate tax credit that apply to UK onshore policies generally do not. So Anita in the earlier example faces an Indian tax bill on her Rs 22 lakh gain and, separately, a UK income-tax charge on the same gain, with Foreign Tax Credit the only thing standing between her and genuine double taxation. The FTC mechanics for NRIs are set out in the foreign tax credit and Form 67 guide.

The UAE has no personal income tax, so a UAE-resident NRI generally faces no host-country tax on the maturity, leaving only the Indian position to manage. Canada taxes residents on worldwide income and applies its own foreign-policy and offshore-investment-fund rules, so the Canadian overlay is real and closer to the UK and US end of the spectrum than the UAE end.

The honest framing here is that the country you live in usually has the last word. An Indian exemption is necessary but not sufficient for a tax-free outcome; you have to clear both the Indian test and the home-country test, and for US and UK residents holding investment-style policies, the home-country test is the one that bites.

The closing read

The phrase "tax-free under 10(10D)" was sold to a generation of NRIs as if it were a permanent feature of life insurance. It is not, and it has not been for years. For most ordinary protection policies with modest premiums relative to a real death cover, the maturity is still genuinely exempt, and that is fine. The problem is the large investment-style policy, the kind sold hardest to NRIs with money to deploy, and that is exactly the policy the two premium lines were drawn to catch.

So here is the honest read at the end. Check three things before you trust any "tax-free" claim on a policy you hold or are being sold. First, the 10% of sum assured rule for anything issued since April 2012. Second, the relevant rupee cap: Rs 2,50,000 aggregate for ULIPs since February 2021, Rs 5,00,000 aggregate for traditional plans since April 2023. Third, and the one almost nobody checks, what your country of residence does to the payout, because the US and UK ignore 10(10D) entirely and can tax a gain that is exempt in India. If the policy clears all three, the tax-free claim is real. If it fails any of them, treat the payout as taxable, plan for the Section 195 deduction, and decide whether the policy is worth keeping at all. For an NRI buying fresh cover, the cleaner answer is almost always to separate the jobs: a term plan for protection, where the death benefit stays exempt everywhere, and a low-cost fund for the investment, where you control the tax. Bundling the two inside an insurance wrapper buys you a premium cap, a higher NRI withholding rate, and a home-country tax problem you did not need.

Related guides

• ULIPs for NRIs: the Rs 2.5 lakh premium line and the charge stack
• Indian ULIPs and endowment plans: the US person tax trap
• Paying India insurance from an NRE or NRO account
• TDS for NRIs and how refunds work
• Lower TDS certificate via Form 13
• DTAA mechanics, TRC and Form 10F
• Foreign tax credit and Form 67
• Capital gains tax for NRIs on shares and mutual funds
• ITR filing for NRIs, AY 2026-27
• Tax-efficient investing for NRIs
• NRI dividend tax in India
• Repatriating investment proceeds from India
• All taxation guides
• All investments guides
• All banking guides

Disclaimer

This guide is general information for NRIs, not personalised financial, tax, or insurance advice. Tax rules, including the Section 10(10D) premium thresholds, the Rs 2,50,000 ULIP cap from February 1, 2021, the Rs 5,00,000 traditional-policy cap from April 1, 2023, the Finance Act 2025 capital gains treatment of non-exempt ULIPs effective April 1, 2026 (AY 2026-27), the Section 56(2)(xiii) and Rule 11UACA computation, and the Section 194DA and Section 195 TDS rates, can change, and their application depends on your specific policy wording, issue date, premium history, and residential status. The host-country treatment in the US, UK, UAE and Canada depends on your personal circumstances and the relevant tax law and treaty in force. Verify the current rules and your own policy documents, and consult a qualified chartered accountant or a cross-border tax adviser before acting on any maturity, surrender, or repatriation decision.